Cost: California is Least Fair in Tax Appeals

Reprinted from Caltaxletter - June 22, 2001

Another national survey of states’ tax administration has concluded that California is one of the least fair in the handling of tax appeals. The latest “scorecard” was produced by the Committee on State Taxation (COST).

The COST report cites the 1996 and 2000 surveys of CFO Magazine, which ranked California’s Franchise Tax Board among the bottom five states in fairness and predictability.

COST said that unlike CFO, which looked to both “substantive tax positions and perceptions” in its surveys, COST ranks the states according to the efficacy of their tax appeals systems and according to each state’s adherence to five selected procedural elements: even-handed statutes of limitations; equalized interest rates; adequate time to file protests; automatic extension of state return filing dates beyond the federal due date; and whether federal audit changes open the entire state tax return to audit.

“These elements, at a minimum, should be part of any state’s tax administration that seeks to achieve fairness, efficiency and a customer-focused environment,” the report said.

On points from zero to 12, California ranked with Oklahoma as the worst (5).

Ranking right above were the District of Columbia, Massachusetts and Texas (6); Oregon and Rhode Island (7). The most fair, efficient and customer-focused states (scoring 12 of a possible 16) were Virginia, Vermont, Nevada, Missouri, Michigan, Kentucky, Kansas and Arizona. (Three states rated among the five worst by CFO - Pennsylvania, New York and Louisiana - were nearly average or slightly above average in the COST survey. The average is nine points.)

The report found California to be even-handed with its statutes of limitations (four years for both refunds and assessments), but lacking in equalized interest rates, which vary by formula and are unequally applied. Payment or a bond is required by California prior to an independent hearing on an appeal, and a federal extension does not automatically extend the due date for the California return. Further, a federal revenue agent’s report opens the entire California return to audit, which is not the case in most other states.

The report is authored by Douglas L. Lindholm, president and executive director of COST, a nonprofit trade association based in Washington, DC, and Stephen P.B. Kranz, COST’s tax counsel. It was published in State Tax Notes (June 18).

If you have any questions regarding this article, other sales and use tax issues, or want to know if you qualify for an exemption contact Joseph Micallef at (916) 369-1200 or visit us on the web at www.ASTC.com.