Political Notebook

Dan Walters: California tax board gets a spanking, then makes it worse

The state can legally tax sales and leases of “tangible personal property” such as cars, clothing and appliances, with exceptions such as food and prescription drugs.

However, it cannot tax services and other “intangibles.” And while there is a strong case for including services in the sales tax – particularly were it to mean an offsetting decrease in tax rates – until that moment comes, they are exempt.

One might assume that the folks at the state Board of Equalization who collect sales taxes would know that.

One also assumes they know that, under long-standing court decisions, when tangibles and intangibles are included in one transaction but easily separated, only the tangibles may be taxed.

However, the board’s tax collectors repeatedly have attempted to impose sales taxes on intangible portions of transactions and repeatedly failed when taxpayers have taken them to court.

The most recent example occurred last month when the state Supreme Court refused to hear the board’s appeal of a unanimous appellate court ruling that favored Lucent Technologies and AT&T regarding the state’s attempt to tax software and instructional materials included in the sale of communications equipment to telephone companies.

The Board of Equalization didn’t just lose the case. The appellate justices excoriated the board for trying to impose levies on tax-exempt intangibles and endorsed a $2.6 million penalty to cover the firms’ legal costs.

Despite statute and case law to the contrary, appellate Justice Brian Hoffstadt of the 2nd District Court of Appeal wrote, “the board continued to oppose AT&T/Lucent’s refund action (and) countersued for more than $18 million ...”

“It is certainly up to the board to decide whether to take positions at odds with binding, on-point authority,” Hoffstadt added, “but ... the board is not free to require taxpayers to bear the cost of a litigation strategy aimed at taking a third, fourth, or fifth bite at the apple.”

Lucent/AT&T obviously had the resources to fight – and win – through three judicial layers, but how would a small business react if confronted by the same imperious demands? Would its owner just pay up rather than run the legal gantlet?

A curious footnote to the case is that Jerome Horton, the board’s chair, has called for a briefing in closed session at the Feb. 23-25 board meeting “to allow the board to consider the next steps and how best to expedite the administration of this decision and take appropriate action to implement the Court of Appeal’s decision.”

Open-meeting law allows closed sessions to discuss “pending litigation,” but this case is really no longer pending. And changing practices to comply with the decision is not a fit topic for a closed meeting.

In an interview, Horton tried to explain a rationale for calling the closed meeting, but his reasoning was weak at best.

It appears as if, having been spanked by the courts for its extralegal arrogance and wasting taxpayers’ money, the board wants to launder its dirty linen in private.

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