The California Attorney General (AG) recently issued Legal Opinion No. 23-701 stating that the California Office of Tax Appeals (OTA) has the authority to determine whether tax regulations issued by the Franchise Tax Board (FTB) or California Department of Tax and Fee Administration (CDTFA) conflict with the governing statutes and may decline to follow the regulations in determining a taxpayer’s liability. The OTA had previously stated that it did not have the authority to do so and sought clarification from the AG.
In this alert, we provide a brief background of the OTA and the circumstances that lead to the opinion request, provide an overview of the AG’s opinion, and offer a few key takeaways to consider. Of course, if you have any questions regarding how these changes might impact your California case or want to discuss your options for tax appeals in California more generally, please consider reaching out to legal counsel.
In 2017, the California legislature created the OTA and transferred it to the statutory duties, powers, and responsibilities that the Board of Equalization (BOE) had previously held as the administrative appeals body for contesting taxes and fees in California. Historically, the BOE had allowed taxpayers to argue that regulations impacting their tax liability were inconsistent with governing statutes, and if the BOE agreed, the BOE would not apply the regulation to the taxpayer.
When taxpayers began challenging the validity of tax regulations in appeals before the OTA, the OTA held that it lacked the statutory authority to independently evaluate the validity of the regulations and could not decline to apply a regulation. Following those decisions, in 2023 the OTA proposed a new regulation that would have barred taxpayers from challenging the validity of a regulation except in cases where an appellate court had already determined that the regulation was invalid. The proposed regulation was met with concern from taxpayers and industry professionals who argued that it conflicted with governing law. The OTA then withdrew the draft regulation and submitted a request for an opinion from the AG.
After reviewing the history of the BOE and the OTA, the authorizing statutes, and the Administrative Procedures Act, the AG concluded that the OTA has the authority to evaluate whether applying a tax regulation to a particular taxpayer’s circumstances would conflict with applicable statutes. If the OTA determines that a regulation does conflict with a statute, the OTA can decline to apply the regulation in that case. The AG notes that the OTA must afford appropriate deference to the agency that issued the regulation, just as a court would do as part of a judicial review. Additionally, the OTA’s determination that a regulation is invalid applies only in the context of that specific taxpayer appeal and does not repeal or invalidate the regulation generally.
The AG rejected arguments made by the OTA that such authority violates the separation of powers doctrine or provisions of the California Constitution that bar state agencies from refusing to enforce statutes on constitutional grounds absent a court ruling. The AG concluded that because the OTA adjudicates statutory, and not constitutional, challenges to regulations, no constitutional concerns are implicated.
The AG opinion clarifies the scope of the OTA’s authority, and the OTA must consider taxpayer challenges to tax regulations.
Taxpayers who are considering an appeal to the OTA should review the regulations relied upon by the FTB or CDTFA in making their determinations and evaluate if they are consistent with the governing statutes. Taxpayers should raise and preserve any challenges they may have in their filings and hearings before the OTA. If you have any questions about the AG opinion, or about your California tax issue in general, please consider reaching out to legal counsel.
