BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 450 N Street, Room 121 Sacramento, California REPORTER'S TRANSCRIPT JUNE 9, 2009 LEGISLATIVE COMMITTEE Reported by: Beverly D. Toms No. CSR 1662 1 1 2 P R E S E N T 3 4 For the Committee: Judy Chu Chair 5 Betty T. Yee 6 Member 7 Bill Leonard Member 8 Michelle Steel 9 Member 10 Marcy Jo Mandel Appearing for John 11 Chiang, State Controller (per Government Code 12 Section 7.9) 13 Diane Olson Chief, Board 14 Proceedings Division 15 Board of Equalization 16 Staff: Margaret Shedd 17 Robert Lambert Legal Department 18 Carolee Johnstone 19 Legal Department 20 ---oOo--- 21 22 23 24 25 26 27 28 2 1 2 INDEX OF SPEAKERS 3 4 Speaker: Page 5 Michele Pielsticker 9 6 Leanne Tratton 11 7 8 9 ---oOo--- 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 3 1 Sacramento,California 2 June 9, 2009 3 ---oOO--- 4 MS. OLSON: Good morning, Madam Chair and 5 Members. The first item on today's agenda is the 6 Legislative Committee. Dr. Chu is the Chair of this 7 Committee. Dr. Chu. 8 DR. CHU: I'd like to call the Legislative 9 Committee to order. We have just one item here, which 10 is item number 5-4, the cigarette and tobacco law, 11 limitations on attorneys' fees. So if we could have a 12 staff presentation. 13 MS. SHEDD: All right. Suggestion 5-4 was 14 suggested by the Legal Department. It would conform all 15 of the Board of Equalization, Special Taxes, Property 16 Tax and Franchise and Income Tax law to the Sales and 17 Use Tax law limiting litigation costs, including 18 attorneys' fees. 19 In this regard, in 1988 as part of the Taxpayer 20 Bill of Rights Act the Sales and Use Tax law was 21 enacted. And that's Section 7156, that limits the Board 22 of Equalization's exposure to litigation costs by 23 requiring a prevailing taxpayer to establish that the 24 position of the State of California in the civil 25 proceeding was not substantially justified. 26 And even where this is established generally 27 limits the Court's award of attorneys' fees to $75 per 28 hour. 4 1 This proposal would conform all of the Board's 2 tax and fee programs to that Rev. and Tax section. In 3 addition, it would add two uncodified sections. The 4 first would make the statutes added by the bill 5 applicable to all pending proceedings and retroactive to 6 the extent permitted by the California Constitution and, 7 secondly, it would add that this is the exclusive means 8 by which litigation costs and attorneys' fees may be 9 awarded. 10 I have with me Carolee Johnstone from the Legal 11 Department and Robert Lambert. And Carolee would like 12 to make a brief presentation. 13 MS. JOHNSTONE: Good morning, Madam Chair and 14 Members of the Board. All of the statutes that are 15 being proposed to be added to the -- all of the tax and 16 fee programs that are administered by the Board are 17 based on Section 7156 of the Sales and Use Tax law. The 18 Sales and Use Tax law 7156 was based on a Federal law 19 that was enacted in 1982. The joint committee on 20 taxation at that time, the Federal Joint Committee on 21 Taxation at that time did determine that the -- that the 22 statute that they enacted was intended to be exclusive 23 of any other remedy. 24 The -- Section 7156 provides that a -- a 25 prevailing taxpayer may only -- may collect -- or may be 26 awarded litigation costs and attorneys' fees when -- in 27 connection with collection -- determination and 28 collection or refund of any tax if as -- as Margaret 5 1 mentioned, the Board has -- is determined to have taken 2 an unreasonable or unjustified position in a matter. 3 The -- and they're limited to reasonable 4 litigation costs based on prevailing market rates for 5 expert witnesses, reasonable costs of any study and 6 other types of projects and the reasonable fees. And it 7 is limited to $75. 8 One of the reasons that the Congress said that 9 they had enacted theirs was not to limit the 10 availability of litigation costs to prevailing 11 taxpayers, but to provide them with availability of -- 12 of litigation costs in tax cases. 13 Prior to that there wasn't across the board 14 availability and in California there was not, before 15 7156 -- or actually the other statute that preceded 7156 16 in California was the FTB -- FIT statute 19717, which 17 is -- and all three, the Federal, the FTB and the BOE 18 Sales and Use Tax statute all have the exact same 19 elements in them. 20 The -- but the -- all of these statutes have -- 21 oh, there was nothing prior to the 19717 in California 22 for access to -- for taxpayers to recover litigation 23 costs or attorneys fees. And until 2008 the -- it was 24 intended or understood that 7156 and 19717 were both 25 exclusive and it was only one case that decided 26 otherwise. 27 Therefore, that's -- we believe that that -- 28 the Legislature -- the Board and the Legislature should 6 1 be rectifying -- correcting the Court in this manner 2 and -- and stating -- clarifying that the statutes are 3 intended -- or at least 7156 is intended to be 4 exclusive. Thank you 5 DR. CHU: Yes, Mr. Lambert. 6 MR. LAMBERT: I think our staff position -- 7 staff recommendation is that there should -- consistent 8 with the Federal statute and consistent with what we 9 believe to have been the original intention of the 10 Franchise Tax Board statute in 7156, that it should 11 be -- there should be an exclusive remedy that requires 12 a demonstration that the tax agency adopted an 13 unreasonable position before the Plaintiffs Bar can seek 14 attorneys' fees from the tax agency. 15 I think the -- the goal of the Federal -- the 16 original Federal statute upon which all the rest was 17 based was to not encourage the Plaintiffs Bar to sue tax 18 agencies merely for the purpose of getting attorneys' 19 fees. 20 And it also has the purpose of encouraging the 21 tax agency to adopt reasonable positions. We think 22 that's a reasonable policy that would support adoption 23 of these statutes in this case. 24 DR. CHU: Okay. And so you're saying that the 25 BOE statute was in 1982, so we're talking about 27 years 26 that it's been in existence. 27 MS. JOHNSTONE: No, the BOE statute was not 28 enacted until 1988. 7 1 DR. CHU: Okay. 2 MS. JOHNSTONE: But, actually, the statute that 3 is mentioned by several -- the two opponents to this, 4 the Code of Civil Procedure statute 1021.5, which is the 5 Private Attorney General statute, that was enacted in 6 1977. And until 19 -- until 2008 it was never applied 7 to a tax. 8 MR. LAMBERT: To the -- yeah, to a Franchise 9 Tax Board Board case. 10 MS. JOHNSTONE: Or to a -- okay. 11 DR. CHU: But at least with the 1988 statute 12 then it's -- at the BOE it's -- it's been in existence 13 for 21 years. 14 MS. JOHNSTONE: Right. Exactly. 15 DR. CHU: Okay. 16 MR. LAMBERT: It just hadn't been adopted for 17 Special Taxes, only for Sales Taxes. 18 DR. CHU: Right. Exactly. 19 MR. LAMBERT: So it's a -- its' a hole that 20 should be filled, in our opinion. 21 DR. CHU: Okay. We have two speakers, so if we 22 would call them forth. Michele Pielsticker and Leanne 23 Tratton. 24 ---oOo--- 25 26 27 28 8 1 MICHELE PIELSTICKER. 2 MS. PIELSTICKER: Good morning, Madam Chair, 3 Members of the Board. We are opposed -- Michele 4 Pielsticker, Cal Tax. We're opposed to suggest -- to 5 suggestion 5-4 as it would preclude retroactively the 6 use of Section 1021.5, the Code of Civil Procedure, to 7 obtain attorneys' fees. 8 Although we do appreciate the Board's need to 9 limit attorneys' fees exposure in these difficult times, 10 we believe that eliminating Section 1021.5 as a means of 11 obtaining attorneys' fees awards in tax cases would be a 12 serious mistake. 13 Section 1021.5 fees only are awarded when a 14 Judge determines that the action results in the 15 enforcement of an important right affecting the public 16 interest. Many times the amount at issue is small but 17 the significance of the issue is very large for 18 taxpayers in general. And most often we see these types 19 of cases where the constitution -- constitutionality of 20 a tax or a fee is challenged. 21 Section 1021.5 provides assurance that the 22 State will be held accountable for unconstitutional 23 acts, even when the amount at issue would not normally 24 justify a private claimant bringing the action given the 25 costs of litigation. 26 So the possibility of 1021.5 attorneys' fees in 27 these situations levels the playing field for taxpayers 28 vis-a-vis the State as they could not afford to bring 9 1 the case otherwise. 2 For these reasons the right of taxpayers to 3 receive 1021.5 attorneys' fees awards should be 4 protected and we oppose this legislative proposal. 5 ---oOo--- 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 10 1 LEANNE TRATTON 2 MS. TRATTON: Madam Chair and Members, Leanne 3 Tratton representing Consumer Attorneys of California. 4 This is not our typical forum and I'm kind of pleased to 5 be sitting here with Cal Tax, which is another unusual 6 coalition. But we really are here for the same reason, 7 and that is to argue for the small business owners that 8 without the availability of these 1021.5 attorneys' fees 9 would have absolutely no access to justice. 10 And, you know, in these times where we are 11 struggling to bring revenue into the state, we're 12 sympathetic to the needs of the Board of Equalization 13 to, you know, fight to collect these revenues. 14 However, we have to be cognizant of the rights 15 of people who believe that the fees or taxes are 16 illegally charged, and they have to have the ability to 17 challenge that. 18 These -- the particular taxpayers in this case 19 spent nine years through the administrative process 20 attempting to resolve their claim and then had to 21 ultimately go to Court, where they did prevail, and at 22 least one Court has found that it was an illegally 23 charged tax. 24 These small business owners are not in the same 25 position as many of the people who sit in the room 26 today. I'm sure Chevron and tobacco industry, other 27 industries will have no problem challenging an illegal 28 tax. But a small business owner is simply not in the 11 1 position to -- they're faced with a tax that they have 2 to pay and then on top of that fight nine years and then 3 into Court. And the standard for 1021.5, as has been 4 stated by Cal Tax, is not a simple one to meet. 5 It truly is only availed when a person 6 challenging the tax is arguing in the public interest 7 and could not otherwise, you know, argue because their 8 financial means simply would not permit it. 9 We really believe that it's important to keep 10 this measure in place, which is very different from the 11 existing $75, which in some ways is almost more like 12 a -- a punitive measure. 1021.5 is truly only enacted 13 when there is a benefit to the public at large. 14 And we would argue that, number one, this 15 should never be operated retroactively to take away the 16 ability of the people who have already been going 17 through this process, but would also argue that it is 18 not -- in fairness should not be eliminated as a -- a 19 proper means of giving small business owners the ability 20 to challenge these taxes. 21 For that reason we urge your "no" vote. 22 DR. CHU: Okay. Thank you for your -- for your 23 testimony. And Ms. Yee. 24 MS. YEE: A question for the staff. I know the 25 impetus for this proposal was really to try to bring the 26 other tax and fee programs in line with what we have 27 under current law under the Sales and Use Tax law. 28 MR. LAMBERT: That -- yes. 12 1 MS. YEE: But the exclusive remedy provision is 2 not part of the Sales and Use Tax law. 3 MS. JOHNSTONE: That's correct. 4 MS. YEE: Okay. 5 MR. LAMBERT: The language -- yeah, the 6 language is different, but I think for 20 -- more than 7 20 years people assumed it was the exclusive provision. 8 I think that was the accepted provision for a long time. 9 And there still hasn't been a sales tax case similar to 10 what they had with the Franchise Tax Board. And the 11 Federal statute of course is exclusive. 12 So, I think that was the original intention. 13 This would clar -- I think this is -- we look upon it 14 more like a clarification back to what the original 15 intention and understanding was for a very long time. 16 MS. YEE: Okay. Now your application of what 17 we currently have in the Sales and Use Tax law would 18 apply to all of our other tax and fee programs, 19 including Franchise and Income Tax -- 20 MR. LAMBERT: Yes. 21 MS. YEE: -- cases that go to Court? 22 MR. LAMBERT: Yes, indeed. 23 MS. YEE. So how do we reconcile this -- does 24 the Franchise Tax Board have a separate section relative 25 to -- 26 MS. MANDEL: My understanding of -- and they 27 can jump in and correct me if I'm wrong, my 28 understanding of this proposal as it impacts Franchise 13 1 and Income Tax cases is this proposal addresses 2 attorneys' fees where someone -- I mean it has two 3 parts. It addresses attorneys' fees where someone in a 4 Franchise and Income Tax case might happen to try to get 5 some kind of judgment against this Board. 6 That's the -- 7 MR. LAMBERT: Right. 8 MS. MANDEL: -- affirmative attorneys' fees. 9 MR. LAMBERT: For example, we might be sued 10 because they allege we failed to send a privacy notice 11 during the appeals process. It doesn't have anything to 12 do with -- 13 MS. MANDEL: But the -- 14 MR. LAMBERT: -- with the substantive tax 15 issue. 16 MS. MANDEL: Right. And the uncodified 17 provisions -- do the uncodified -- proposed uncodified 18 provisions otherwise impact the existing Franchise 19 tax -- 20 MS. JOHNSTONE: No. 21 MS. MANDEL: -- provision? 22 MS. JOHNSTONE: I'm sorry. 23 MS. MANDEL: And -- okay, no. And then you're 24 correct, there is a pending alive Franchise Tax Board 25 Legislative proposal to again clarify as the Franchise 26 Tax Board -- this was proposal 07-12 that the Board 27 adopted on November 28, 2007, to clarify that the 28 Franchise tax provision was always intended as the 14 1 exclusive provision for attorneys' fees and was to 2 provide an -- attorneys' fees which had not previously 3 existed and it was -- it was in conformity with the 4 Internal Revenue Code. 5 The -- the one difference that you'll remember 6 because you were on Franchise Tax Board at the time this 7 was adopted, was the Franchise Tax Board legislative 8 proposal does not have the retroactive piece. 9 That's the -- that's the difference. 10 And there's another difference between them, 11 actually, too, but that stems from a difference in -- 12 between the existing Sales Tax provision, which has not 13 been updated, and the Income Tax provision -- 14 MR. LAMBERT: The dollar ground. 15 MS. MANDEL: -- which had been updated with the 16 Internal Revenue Code on the dollar figures. 17 MR. LAMBERT: Right. 18 MS. YEE: Okay. Then a follow-on question, I 19 am troubled by the retroactivity. And certainly parties 20 that are kind of engaged in the process now -- 21 MR. LAMBERT: Can I address that, briefly? 22 MS. YEE: Uh-huh. 23 MR. LAMBERT: Number one, we understand that -- 24 and this is a staff proposal, and we understand that 25 it's up to the Board with respect to whether it would 26 adopt that recommendation. It's up to the Legislature 27 and the Governor to actually adopt it, and it's up to 28 the Courts to uphold it. 15 1 But our reasons are as follows: That the -- 2 that the Legislature is permitted to enact a -- 3 retroactive tax provisions, you know, subject to no due 4 process problem. There's -- a rational basis is 5 essentially presumed with an economic legislation of 6 this -- this type. 7 With respect to due process, we think we're 8 probably okay here because there is no vested right. 9 There's no contract. There's no final judgment. If the 10 Judge -- if the trial Court judgment which its -- the 11 appeal period is still open for -- is appealed, it can 12 be overturned on -- on appeal. It's not a vested right. 13 There's no -- it's not permitted to rely upon a 14 tax statute. There is an important State right, we 15 think, which is the right to preclude the Plaintiffs Bar 16 from suing State agencies on some things that are close 17 calls or they're not unreasonable positions. 18 I mean, reasonable minds can differ and Judges 19 frequently disagree with State tax officials. We don't 20 think that's appropriate nor is it the intention of the 21 Legislature that people be able to collect attorneys' 22 fees in those situations. 23 We think the important State right is to 24 preclude a State agency from being sued except in the 25 case of a demonstration of a substantially unreasonable 26 position. That's where we think the equity lies. 27 That's where we think justice lies. Not with attorneys' 28 fees in what might be a close case. 16 1 There are going to be -- there are going to be 2 a lot of those if that's -- if that's the situation. We 3 do not feel that it's -- they -- there would be a 4 reasonable reliance in this case upon the existing law. 5 For most of the last 20 some odd years people assume 6 that the 7156 -- that type of law was the -- the 7 exclusive remedy. 8 Secondly, we don't think this presents an undue 9 burden. There has been tax cases where someone might be 10 required to go back nine years and dig up their old 11 receipts and things, and that might be found to be an 12 undue burden on someone exercising their due process 13 rights. That's not the case here. There's not -- 14 there's not that type of a burden. There's no type of 15 undue burden in this situation. 16 So we think it's a fair case for retroactive 17 application, but understanding that it's subject to the 18 Board, the Legislature, the Governor and ultimately the 19 Courts. 20 MS. YEE: Okay. Thank you. 21 DR. CHU: The main thing that I heard from 22 the -- the opponents is that this would limit the rights 23 of people to bring suit because of the lack of ability 24 to -- to get attorneys' fees. 25 Can you address that? 26 MR. LAMBERT: Well, if the -- if -- as we say, 27 we believe the policy of the Federal Government and the 28 California Legislature has been people should be able to 17 1 get attorneys' fees from the State if the State agency 2 adopts a position that's shown to be substantially 3 unreasonable. We think that's the government policy. 4 We think -- there is no policy permitting them 5 to recover attorneys' fees when they win on a close call 6 or something -- a position adopted that's not 7 unreasonable. 8 We think the policy is to -- is not to 9 encourage people to sue the State just to get attorneys' 10 fees and the policy is also to encourage State taxing 11 officials to make reasonable decisions. 12 But if it's -- a reasonable decision is made 13 and reasonable minds differ, I think the policy of both 14 the Federal and the State Government is not to permit 15 the recovery of attorneys' fees. 16 MS. JOHNSTONE: May I address that? Also -- 17 DR. CHU: Yes. 18 MS. JOHNSTONE: -- with respect to Section 19 1021.5 in the Civil Code, that -- as I mentioned before 20 that was enacted in 1977. And up until 2008 it was -- 21 it was only mentioned in one case that -- and it wasn't 22 applicable. And so, therefore the idea that some -- 23 that taxpayers in California are losing a -- a right 24 that they've had for many years is -- is not really -- 25 is sort of a misstatement. 26 DR. CHU: So, basically on the issue of 27 attorneys' fees the Courts can allow for a reasonable 28 reimbursement of the costs? 18 1 MR. LAMBERT: If they establish that the 2 position of the Board -- if these statutes were to 3 be adopted they have to establish that the position of 4 the Board was substantially unreasonable. 5 And we think that's the policy of the 6 Legislature, which again was modeled on the Federal 7 statute, which is the exclusive remedy for suing the IRS 8 for this type of -- for recovering attorneys' fees 9 against IRS in this kind of dispute. 10 So we think that's the policy that the 11 Legislature has wanted, and we look upon this more as 12 clarifying the original intent, which was accepted as 13 Carolee said for many, many years. 14 DR. CHU: Well, I'd -- I'd like to say that I 15 think this -- this bill idea is -- is especially 16 important to present today considering our State's 17 out-of-control budget deficit, and the fact that we are 18 now facing the most unimaginable cuts ever in our 19 State's history. 20 And we -- the BOE is responsible -- we are 21 responsible for bringing in $53 billion a year in 22 revenue for the State. 23 Now, this has come to a head because recently 24 there was a claim for a refund of approximately 68,000 25 in cigarette taxes. But taxpayer's counsel filed a 26 claim for over $1.3 million in attorney's fees. And 27 though the Court's awarded the refund, it's not awarded 28 the attorney's fees yet. 19 1 MR. LAMBERT: The trial Court has awarded 2 attorney's fees in a lot less amount than that, but they 3 did make an award. 4 DR. CHU: Oh. 5 MR. LAMBERT: It hasn't been in a judgment -- I 6 think it's still within the appeal period. It's 600,000 7 and change. 8 DR. CHU: Okay. So -- so, it's about half 9 then. 10 MR. LAMBERT: I think so. 11 DR. CHU: Okay. And -- and nonetheless it's -- 12 well, actually, it -- it probably mirrors what the 13 actual -- 14 MS. MANDEL: It's about -- 15 DR. CHU: -- costs were then. 16 MS. MANDEL: I think it's about 1.5 times -- 17 MR. LAMBERT: There's a multiplier 1.5 times -- 18 MS. MANDEL: It was a multiplier. 19 MR. LAMBERT: -- what the Court accepted as a 20 reasonable actual attorney's fee. I think that's -- 21 that would be the answer. 22 How -- I think 400 some odd thousand was what 23 they accepted as a reasonable attorney fee, and I think 24 they multiplied it by 1.5. I think that's correct. 25 MS. MANDEL: But -- but even the reasonable 26 attorney's fees I think even would have been on a per 27 hour basis even higher than what the income tax statutes 28 provide for currently. 20 1 MR. LAMBERT: That was a contested matter in -- 2 MS. MANDEL: Yeah. 3 MR. LAMBERT: -- in litigation. But that was 4 their assertion, yeah, certainly. 5 MS. MANDEL: Right. 6 DR. CHU: Nonetheless, if this were a case 7 about sales tax then this claim would not have taken 8 place in -- in the first place. 9 MR. LAMBERT: Well, they would have had to 10 establish something they didn't have to establish here, 11 which is that the Board's position was substantially 12 unreasonable. 13 DR. CHU: Uh-huh. So in my opinion this bill 14 will simply bring the parameters for attorney's fees 15 that are currently in existence for Sales Tax to the 16 issue of Special Taxes and Fees. It fills the hole, as 17 you said, and it is important to keep in mind that 18 that -- the taxpayer can -- can appeal to the Court to 19 increase the amount for reasonable fees. In addition, I 20 think we really have a responsibility to bring this 21 issue to the attention of the Legislature. I know it's 22 early in the process and that there may be a lot of 23 changes to the bill. Nonetheless, I think it's 24 important to bring the bill idea to the State and that 25 there are many, many committees that this would have to 26 go through with many changes that could occur. 27 But to ignore this issue I think would be a big 28 mistake. 21 1 MS. PIELSTICKER: Madam Chair, may I address 2 some other -- okay. 3 Michele Pielsticker, Cal Tax once again. 4 I -- I just want to emphasize once again that 5 this is not just conforming to Sales Tax and Income Tax. 6 It's making this the exclusive remedy and I also 7 would -- would like to restate that 1021.5 fees in tax 8 cases are rare mainly because there's -- it's such a 9 high standard. And those are applied in situations only 10 when you have a right affecting the public interest, and 11 generally they're used when people normally would not 12 find it economically justifiable to go forward. 13 We're talking about holding -- holding the tax 14 agencies accountable with regard to unconstitutional 15 acts. And oftentimes those don't involve large amounts. 16 And so, while it may be reasonable to place a 17 limitation with regard to tax justification in a dollar 18 amount, I don't think that it would be reasonable to 19 make that the exclusive remedy. 20 DR. CHU: Any other feedback? 21 Or questions or comments. 22 MR. LEONARD: Madam Chair. 23 DR. CHU: Mr. Leonard. 24 MR. LEONARD: I don't have any questions. I 25 would speak in opposition to the proposal. First of 26 all, retroactive law is just un-American. To change the 27 rules of the game after the game is started or almost 28 over is just -- just wrong. 22 1 Secondly, and maybe it's because I'm at the 2 losing end of so many of our taxpayer cases, not that I 3 want every losing taxpayer to sue the Board of 4 Equalization because reasonable minds do differ, but 5 there are a number of those where I think another review 6 of our decision would be in order. And this will just 7 put a lid on that. 8 It not only puts the threshold just beyond what 9 anybody could allege or prove in Court, but it puts a -- 10 an economic -- it's -- $75 an hour is a joke. You guys 11 are all laughing. None of our lawyers work for so 12 little in our Department. So it -- it just strikes me 13 as -- 14 MR. LAMBERT: Yet. 15 MR. LEONARD: Yeah. Well, when they do then 16 maybe I'll change my mind. But we're -- we're not there 17 yet. 18 It just strikes me that what we're -- the 19 message we're sending is the Government's too big, too 20 powerful and we're always right, and even if we're wrong 21 we're not going to let anybody challenge us and -- and 22 debate that before an independent forum. 23 And it's -- we're not sued -- this Department 24 is not sued that often. And when the Department is sued 25 we don't lose that often as a Department. So, it just 26 strikes me that the -- the rare number of cases where a 27 judiciary says, "You guys did do it wrong, but it's 28 appropriate to -- to pay the representative of that 23 1 taxpayer a reasonable amount," and I trust the Court and 2 their expert system, they do it every day in -- in civil 3 lawsuits. In fact, if this law is such a great idea why 4 don't we apply it to all civil cases, all to our cases? 5 It doesn't work. It does turn particularly 6 unrepresented and poorer taxpayers who cannot afford up 7 front retainers a way from getting rejess -- redress and 8 justice in this land. 9 And for that reason -- all those reasons it's a 10 bad idea. 11 DR. CHU: Ms. Mandel. 12 MS. MANDEL: I think that this proposal has 13 some decent elements in it on sort of varying grounds. 14 The Board I think has generally asked staff to try to 15 bring into the other tax and fee programs all of this 16 sort of procedural elements that we have in Sales and 17 Use Tax I think for many, many years. There was always 18 a giant focus on Sales and Use Tax because it's the 19 biggest item that the Board does. And so, when things 20 come in like this proposal as part of Taxpayer Bill of 21 Rights everything gets stuck into -- into Sales and Use 22 Tax law, and people forget about all the other tax and 23 fee programs. 24 And I -- I do think that like the provision in 25 the Income Tax law, this provision was intended to 26 provide, as Mr. Lambert has said, provide an attorneys' 27 fee remedy -- you had my clock set to alarm. 28 MS. OLSON: Oh. 24 1 MS. MANDEL: -- provide the attorneys' fee 2 remedy in tax cases where none had existed before. When 3 the income tax provision was updated in conformity with 4 the updating of the Internal Revenue Code provision, 5 somehow in code updates over here, I don't think -- I 6 don't think there was an affirmative decision not to do 7 it on the hourly rate, on the -- in the -- on the BOE 8 side. I just think it wasn't done during the updating. 9 And when we had the legislative proposal at 10 Franchise Tax Board at the end of 2007, the -- the -- 11 the attorneys' fee -- the basic attorneys' fee 12 provision dollar-wise in -- I think like 199-- 2001 was 13 brought up to date with the '96 maybe change in the Feds 14 to be $124 with an inflater in it. 15 So, -- excuse me. So that by 2006 the dollar 16 figure on the Income Tax side was $160 an hour as 17 contrasted with the flat 75. 18 Now, I know both provisions I think still have 19 the -- you know, that a Court could award attorneys' 20 fees above the capped rate if there's some special 21 factors. But there is a disconnect currently between 22 the dollar figure on the fee, the cap fee, the basic fee 23 in the Income Tax provision and in the Sales Tax and 24 then which would carry forward to these. 25 So, I don't know if you guys looked at that and 26 just -- you know, and maybe this is, you know, a rough 27 period for the State, but certainly if we're looking at 28 conforming everything maybe they ought to be -- you 25 1 ought to consider that. 2 MR. LAMBERT: I think we don't really oppose 3 that. We just were cut and pasting from the Sales Tax 4 statute at that point. We don't really have an 5 opposition to the Board making the proposal consistently 6 with the hourly rate for the -- on the Franchise Tax 7 Board statue, which is -- 150 an hour or -- 8 MS. SHEDD: There's a cost of living adjustment 9 but for the calendar year 2007 it was $150 per hour. 10 MS. MANDEL: Oh, so it went down from '06 to 11 '07. 12 MS. SHEDD: Well, mine says it was 140. 13 MS. MANDEL: Or unless I'm remembering wrong. 14 Wait, I have it here. 15 MS. SHEDD: On the writeup its on page 3, of LP 16 07-12. 17 MS. MANDEL: Oh, I must -- I'm sorry, I was 18 looking at -- I turned the page to Federal -- Federal 19 law. I guess for some reason maybe Federal law has a 20 slightly different adjustment because they -- 21 MS. SHEDD: I think it's -- yeah, I think it's 22 like -- in 2006 it was 160. 23 MS. MANDEL: Yeah, 140 calendar year to 2007, 24 150 at the state level. So, it was already for last 25 year twice the -- 26 MS. SHEDD: Uh-huh. 27 MS. MANDEL. And then -- and I just -- I had 28 one question, I wasn't sure about the -- the uncodified. 26 1 Why uncodified rather than codified? Is there a reason 2 for that? Not that I'm -- 3 MR. LAMBERT: I think that was just the 4 approach that was adopted by the drafter to establish 5 the legislative history and intent. 6 MS. MANDEL: Okay. And -- and the FTB proposal 7 is not retroactive. 8 MS. YEE: Right. 9 MS. MANDEL: So, that -- or -- or I guess 10 retroactive, some people might say it's a pejorative 11 term, but not applicable to any -- 12 MR. LAMBERT: We're clarifying. 13 MS. MANDEL: Right. 14 MR. LAMBERT: No, I think we're actually saying 15 this is -- we think -- we would like to see it 16 retroactive but as we understand it's -- there's a long 17 process to go through. But that's -- I think it's 18 justified in this case. I think you could establish a 19 due process attack. 20 MS. TRATTON: Madam Chair, Members, may I 21 address some of those points? 22 I did want to clarify that in the sense that 23 we're talking about a conformity issue, we can't ignore 24 that there was a 2008 reported Court of Appeal decision 25 that said that 1021.5 does -- continues to apply even 26 when the Code section, itself, provides for the $75 an 27 hour when the challenge -- or the BOE's actions are not 28 substantially justified. 27 1 And so, it's -- it's not conforming because 2 it's actually -- the -- the State's Appellate Court has 3 been, you know, pretty clear that when a statute is 4 silent and it's enacted after another statute, 1021.5 5 was already in existence, that presumably the 6 Legislature is aware of the availability of that other 7 remedy. And particularly when they serve two very 8 different purposes. 9 You know, when remembering, as Mr. Leonard 10 said, it's a very high standard to meet on the $75 an 11 hour. It's nearly a frivolous standard. And Courts 12 rarely are going to impose fees in that circumstance. 13 And we are not talking about having a bonanza 14 here for the Plaintiffs Bar. From what I understand 15 there have been only been two of these cases brought 16 before the BOE and it's -- they are cases where people 17 would never get here otherwise, and they will not get 18 here under these changes. 19 And I do believe that when we're looking at 20 revenues, increasing revenues in the State, it's very 21 important to give confidence to taxpayers that when 22 there is an illegally charged tax that they will have 23 the ability to bring an action in the public interest 24 and not have it bankrupt them. 25 And I think when we're trying to protect the 26 integrity of our tax system it's very important to keep 27 that power for the people who otherwise have no means to 28 challenge it. 28 1 So, thank you. 2 DR. CHU: Okay. Is there a proposal or a 3 motion? 4 MS. YEE: Madam Chair, I -- just a statement, 5 that I'm happy to make a motion. I'd like to think that 6 this body and this Board kind of provides that forum for 7 taxpayers to come and make their case. And we're a 8 fairly informal process by comparison. So I hope that 9 as we look at this proposal that we're all reviewing our 10 efforts to provide that forum, particularly for the 11 smaller taxpayers. 12 And having heard all of the testimony I'm 13 sensitive to that issue. I'd like to make a motion 14 actually to amend the proposal and -- which is to update 15 the hourly rate to make it consistent with the -- the 16 Franchise and Income Tax provision and statute. And 17 also to remove the retroactivity provision. 18 DR. CHU: Okay. So, there's been a motion for 19 the -- for the bill proposal but with the updating of 20 the attorneys' fees to be consistent with the Franchise 21 Tax Board and then also to remove the retroactivity. 22 Okay. Is there a second? 23 MS. MANDEL: Second. 24 DR. CHU: Okay, then I shall call for the vote. 25 MS. OLSON: Ms. Yee. 26 MS. YEE: Aye. 27 MS. OLSON: Mr. Leonard. 28 MR. LEONARD: No. 29 1 MS. OLSON: Ms. Steel. 2 MS. STEEL: No. 3 MS. OLSON: Dr. Chu. 4 DR. CHU: Aye. 5 MS. OLSON: Ms. Mandel. 6 MS. MANDEL: Aye. 7 MS. OLSON: Motion carries. 8 DR. CHU: Okay. With that then the Legislative 9 Committee meeting is adjourned. 10 MS. SHEDD: Thank you. 11 ---oOo--- 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 30 1 REPORTER'SCERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, BEVERLY D. TOMS, Hearing Reporter for the 8 California State Board of Equalization certify that on 9 June 9, 2009 I recorded verbatim, in shorthand, to the 10 best of my ability, the proceedings in the 11 above-entitled hearing; that I transcribed the shorthand 12 writing into typewriting; and that the preceding 30 13 pages constitute a complete and accurate transcription 14 of the shorthand writing. 15 16 Dated: July 23, 2009. 17 18 19 20 ____________________________ 21 BEVERLY D. TOMS 22 Hearing Reporter 23 24 25 26 27 28 31