Legislative Alert: Updated October 2, 2017

As with most legislation that makes a major policy change in a short time, a clean-up bill is often needed to address unintended consequences, clarify intent and other technical changes. CalCPA was actively involved in raising a concern following passage earlier this summer of AB 102, which distributed much of the Board of Equalization duties to two new state agencies: the California Department of Tax and Fee Administration (CDTFA) and the Office of Tax Appeals (OTA).

The primary responsibility of the OTA, which takes effect Jan. 1, is to hear taxpayer appeals of assessments from the CDTFA and the FTB, and AB 102 established a panel of administrative law judges that would oversee and issue decisions on each appeal. At issue is whether the new OTA is the functional equivalent of a “tax, district or federal court,” and whether the services rendered by a CPA on behalf of a client in such a forum would constitute advocacy services that would potentially impair the CPA’s obligation to be independent related to attest services.

As a result of these concerns, CalCPA worked closely with the governor’s office and legislative leadership to address the issues through amendments to a budget trailer bill that would make technical and clarifying changes to the OTA structure. The product of these efforts, AB 131 was amended and passed just before the end of the legislative session mid-September, and Gov. Brown signed AB 131 into law.

The technical and clarifying changes within AB 131 make clear that an appeal before the OTA is an administrative proceeding and would not in itself threaten to impair a CPA’s independence. The changes further align the structure and operation of the OTA with the Legislature’s overarching intent for a taxpayer to be represented by a broad spectrum of individuals, including CPAs, at every stage of an appeal before the OTA.

Specifically, the statute makes it clear that “taxpayers continue to be able to choose to be represented by certified public accountants and others at every stage of the hearings and proceedings before a tax appeals panel, as was previously the case in matters before the BOE prior to the transfer of duties.”

Additionally, AB 131 includes a mechanism for a taxpayer to request a closed hearing before the OTA. One of the objective criteria for requesting such a hearing is that it is necessary to ensure that an authorized person, including a CPA, may represent the taxpayer.

These adjustments will help shape the forthcoming regulatory structure of the OTA and greatly improve the ability of CPAs who may be representing an audit client in tax matters before the OTA in the same fashion that they did before the BOE. 

Given the fast moving and politically charged reforms to the BOE, getting clean-up legislation to make significant adjustments to the OTA structure that maintains the ability for a large number of CPAs to continue to represent clients on tax appeals is a big advocacy success. 

Recently, the Governor appointed Kristen Kane, 34, of Sacramento, to be chief counsel in the Office of Tax Appeals, where she will serve as acting director. She most recently served as deputy director of the California Competes Tax Credit Program at the Governor's Office of Business and Economic Development (GO-Biz) since 2016 and as tax counsel at the California Franchise Tax Board from 2010 to 2016.

OTA is looking to hire three administrative law judges to serve on the panel and hear appeals cases. The qualifications include being a member of the California State Bar and having tax law experience. These cases would cover all areas of tax law, from sales and use taxes to income taxes. All three positions are located in Sacramento, but hearings could be across California. More information is available online.

Additionally, as the CDTFA takes shape and implements the duties previously belonging to the BOE, we encourage you to regularly check its website

Legislative Alert: Updated August 16, 2017

September marks the last month of the first year in the two-year legislative cycle. Legislators return back to Sacramento after summer recess to debate and vote on pending legislation. With September 15th being the last day for bills to be passed and sent to the Governor this year, it is safe to assume there will be many long days as bills are debated late into the night. Even though this has already been a year packed full of major policy change and government reorganization, it is not uncommon to see new policy initiatives appear in the final days.

A long used procedural process, known as gut-and-amend, allows legislators to “gut” the entire contents of a bill, minus the bill number, and “amend” the bill with entirely new content and policy. This allows the legislator to create a new bill without having to start at the beginning of the process. Mainly used during the last weeks of the legislative calendar, this practice is often used for clean-up language to legislation passed earlier in the year, or to pass major policy quickly and without much debate, or transparency. With the passage of Proposition 54 in 2016, it is now required that any proposed amendments to bills be available to the public for 72 hours before they are voted on. While this limits the ability to move these bills quickly and allow greater transparency for public comment, it is still uncertain how much this will stop the practice of the gut-and-amend.

One relevant example for the end of this session relates to the recent Board of Equalization reforms. As with all major public policy changes, it is safe to assume we will see clean-up language in the form of a “gut-and-amend.” CalCPA continues to work with Legislative leaders and the administration to ensure that CPA’s would continue to be able to represent taxpayers in front of the newly minted Office of Tax Appeals as they did before the BOE.

CPAs and Cannabis

The recent legalization of the recreational use of cannabis has brought a set of new challenges to California. Throughout the year, the State Treasurer’s Office, legislative committees, independent research organizations and industry representatives, have held meetings and informational sessions to discuss the administrative and policy challenges to the implementation of Prop. 64, which legalized the recreational use of cannabis. Much of the discussion focuses on how the state can allow an industry to operate that is still federally illegal. Policy leaders are working hard to develop the oversight structure for those in the industry to properly track and report their business transactions and finances

Specifically, Treasurer Chiang has lead meetings of the Cannabis Banking Working Group, which includes stakeholders from the cannabis industry, tax regulators, local governments, and the banking industry. The working group discussed a number of issues surrounding the regulation of cannabis in California, particularly the challenges resulting from the lack of reliable banking. The group is expected to release a final report and recommendations later this Fall. Specifically to the CPA profession, in July Lori Ajax, Chief of the California Bureau of Medical Cannabis Regulation, spoke to the California Board of Accountancy (CBA) at its July meeting where she gave remarks on the bureaus efforts to create a regulatory framework to oversee the cultivation, distribution, and sale of medical and recreational use cannabis.

Understanding the need for CPAs in this emerging industry, the CalCPA Education Foundation hosted the 2017 California Cannabis Industry Symposium in August. Leaders in the CPA profession, state agency officials and industry representatives presented and discussed topics which included the history of the cannabis industry in California, the former and current regulatory structure, taking on a cannabis industry client, federal and California income tax issues, and other pertinent topics. Board of Equalization Member Fiona Ma was the keynote speaker and gave her perspective on the industry and the role CPAs can play as it grows.

While still many uncertainties still exist. This emerging industry presents the opportunity for CalCPA members to gain new clientele in an exciting and dynamic industry, and CalCPA wants to make sure you have the information and knowledge you need to be successful.

Legislative Alert: Updated July 11, 2017

With the Legislature on summer recess, Sacramento is gearing up for it's final sprint of the 2017 legislative year. Hundreds of bills will be heard an voted on in August. all leading up to the September deadline. CalCPA has positioned itself, through the integral help of its grassroots efforts, to be the voice for CPAs in all matters relating to the profession. We will work diligently to ensure that CPAs are heard and fairly represented as legislation continues to be developed.

BOE Reform

Over the last few weeks, the governor, legislative leaders and members of the State Board of Equalization have addressed significant issues identified in a Department of Finance audit report of the BOE—particularly the inappropriate misallocation of staff and revenue. Recently, the governor’s office and legislative leaders reached a deal that would remove the BOE of all its responsibilities except for those constitutionally assigned to it.

AB 102, known as the “Taxpayer Transparency and Fairness Act of 2017,” was introduced as part of the budget process and passed by the Legislature in just a few days. Under the bill, the BOE retains its state constitutional duties of reviewing and adjusting property tax assessments; setting the rate for gas taxes; and handling assessment of taxes on pipelines, insurance companies and alcoholic beverages. Elected BOE members and the State Controller will continue to oversee these areas.

The bill also moves former BOE duties into two new state agencies, also created under this bill:

  • The California Department of Tax and Fee Administration: The CDTFA will handle most of the taxes and fees previously collected by the BOE, including sales and use tax. Taxpayer and fee payer account information services and deadlines remain as they were until further notice. This new department under the governor’s office would include much of the current BOE staff that handles tax processing duties, including outreach and technical resources for practitioners. It will also include many of the same regulations and processes from the BOE. The CDTFA took effect July 1, 2017, and on July 10, Gov. Brown announced the appointment of Nicholas Maduros as director. The position requires Senate confirmation. Maduros, a Democrat, of Bethesda, Maryland, most recently served as chief of staff at the U.S. Small Business Administration from 2014–17.  
  • The Office of Tax Appeals: The OTA will hear appeals from taxpayers who challenge assessments of income tax, sales tax or special taxes and fees. The new independent office would be headed by a director appointed by the governor to oversee the administrative processes of the appeals. Each appeal would be heard by a panel of three administrative law judges from the office of administrative hearings. The judges would need to have a level of tax expertise and will issue a written opinion after each appeal. A taxpayer would still be able to appeal a decision to a superior court should they chose. The new process also allows for a broad spectrum of individuals, including CPAs, to represent a taxpayer. The OTA will start hearing appeals Jan. 1, 2018; however, tax and fee payers who wish to file an appeal and receive a decision prior to Dec. 31, 2017 should follow the current BOE process. Appeals filed on or after Jan. 1, 2018, for programs statutorily required and under the administration of the newly created CDTFA, will be filed with the OTA. That process will be announced at a later date.

As the proposal was discussed and introduced, CalCPA provided comments to the governor and legislative leaders. CPAs advise millions of taxpayers on tax related matters, assist them with compliance responsibilities and represent them before tax regulators. For the CPA profession, and the taxpayers they represent, the preservation of an equitable process for CPAs to assist taxpayers by appealing tax disputes to a truly independent tax adjudicating body is significant.

CPAs should continue to be able to assist their clients in making their case and receive a final decision after an often lengthy tax protest, just as they are able to do before the current BOE. Further, CPAs should continue to receive reasonable guidance and assistance on navigating complex tax laws on behalf of their clients.

Once the proposal was released, CalCPA raised concerns specific to the CPA profession and its ability to represent clients before the OTA as they did before the BOE. The concerns focused on ensuring that the appeals process is appropriately insulated from politicization and that the new appeals process does not in itself preclude a CPA from representing a client due to independence or the practice of law issues that may arise due to the new appeals venue.

Specifically, CalCPA’s comments focused on:

  1. Preservation of a truly independent and objective tax adjudicating body. The language does attempt to preserve this with the new office of tax appeals. However, the current language does have some holes and raises some questions about how the panel of administrative law judges would be selected, where they would come from and how much influence the new director of tax appeals would have over the process. This has the risk of politicizing the process.  
  1. CPAs are allowed to practice/represent clients in the new process just as they had previously. The language states that accountants can represent clients in an appeal. However, there is the potential issue of a CPA being considered representing a client in court or independence for firms that also provide attest services to a client. This is a uniquely new appeals process that could develop in a way that was more akin to a legal proceeding than a tax administration hearing. Without specifics about the rules of conduct, how the new appeals process would work or a thorough analysis of these yet to be determined rules against existing professional standards and federal rules, we cannot be certain that a CPA can appropriately represent a client without running into independence issues. This is an issue that could prevent a number of CPAs and CPA firms from engaging in the appeals process. 

Both of these points were recognized by the governor’s office and the Legislature. They expressed that the intent was not create a new process that might preclude CPAs from practicing before the new OTA. After the bills passed, both houses adopted a letter to the file to clarify intent and direction related to these reforms. Due in part to the concerns raise publicly by CalCPA, the letters included parts specific to these concerns. This provides a basis to engage and address issues that may come up as the OTA takes shape. Further it is a recognition that the preservation of an equitable process for CPAs to assist taxpayers by appealing tax disputes to a truly independent tax adjudicating body as they have before the current BOE is a significant issue.

CalCPA will continue to work with the governor’s office and the Legislature to ensure CPAs’ interests are represented as this transition takes place.

Tax on Services

Tax on services continues to be a topic of discussion in the Legislature. SB 640 (Hertzberg) proposes to enact a sales tax on services—including those provided by CPAs. While this bill has stalled for this year and never was amended with specifics of how such a complex shift in the tax burden would be accomplished, the introduction of this legislation keeps the issue on the radar within the public policy arena—particularly as tax reform conversations heat up at both the state and federal level. Similar far-reaching tax on services proposals have been introduced in the past. In 2015 and 2016 Sen. Hertzberg introduced SB 8 and SB 1445. Both bills ultimately died in the Legislature when they failed to meet legislative deadlines. Without specifics, these proposals have been characterized as a way to broaden California’s tax base to address a volatile stream of tax revenue. Yet, it would also impose an extremely complex shift in the tax burden to raise billions in new tax revenues.

While the legislation has not moved forward, it will continue to be a marker for future efforts. A tax on service will likely be part of the discussion for a future comprehensive tax reform effort. This conversation could increase should a significant state budget gaps emerge from federal changes to state funding for healthcare coverage or tax policy. A tax on services proposal could be just one piece of larger reform to broaden the tax base and stabilize the state budget.

Financial Literacy

Legislators on both sides of the aisle that agree California needs to place a greater emphasis on teaching financial literacy in our classrooms. Through the CalCPA Institute, CalCPA continues to partner with legislators to help meet the financial literacy needs of Californians. It is encouraging to see legislators take this matter seriously and propose legislation that aims on educating our youth with this vital information.

Assembly Bill 858 (Dababneh) would establish the California Financial Literacy Initiative as a program for improving financial literacy by offering instructional materials for teachers and parents to provide high-quality financial literacy education for K-12 students.

Senate Bill 583 (Stone) seeks to provide a model curriculum in financial literacy for students grades 9-12. Once approved and adopted by the Superintendent of Public Instruction, it would be posted for use on a voluntary basis by educators. 

Federal-State Tensions

As expected, much of the first few months of the legislative session has been marked by public battles between the Trump administration and Democratic leaders in California. With a commitment by President Trump and a Republican majority in both houses in Congress, legislation is already moving through Congress that focuses on repealing and replacing the ACA. While we wait to see what the final version of the federal health legislation looks like when it heads to the President’s desk, the Democrat majority in the state has committed to preserving, or even expanding, the current health care system and has proposed numerous pieces of legislation that do just that. Similar divergence in policy agendas for immigration, education, and environmental regulations, have further divided leaders in Washington and California. The lack of cooperation between the state and Washington continues to overshadow the legislative session as legislators keep a watchful eye on the new administration.

Occupational Licensing

The Little Hoover Commission recently released a study on “occupational licensing” focusing on the “impact of occupational licensing on upward mobility and opportunities for entrepreneurship and innovation for Californians, particularly those of modest means.” The report noted that while occupational licensing provides many benefits to consumers, it also presents a number of negative impacts to consumers and individuals who are prevented from practicing due to licensure requirements. The report particularly discusses these impacts for former offenders, military spouses, veterans and foreign-trained workers. The report offers recommendations to address the identified concerns, including changes to how California licenses occupations and governs its regulatory process. While the Little Hoover Commission study is focused on licensing of occupations rather than professions, there is a concern that the study and resulting recommendations could lead to proposals that may alter general state licensing practices in California, including those of CPAs.

Proposed CPE Changes Advance

The CBA has approved draft regulatory framework to incorporate new CPE delivery methods, nano-learning and blended learning. The framework also will allow for partial CPE credit in as little as 1/5 increments. CBA staff will now bring back final language and begin the regulatory process, which can take 12-14 months before it is completed. The proposed language largely follows the same framework for current CPE delivery methods.

Among the most significant of the proposed changes was the addition of nano-learning and blended learning, two new delivery methods for CPE programs. Nano-learning is defined as a tutorial program that focuses on a single learning subject in a 10-minute timeframe. Blended learning is a format that incorporates multiple learning platforms within the same program.

The draft regulatory language would specifically:

  • Allow for Nano CPE, but exclude the ethics, fraud and regulatory review requirements from the nano. They did not opt for a cap on the number of hours that can be earned through nano.
  • Allow for blended CPE as a new method of delivery.
  • Allow for 1/5 increments of hours after the first full hour for all methods of delivery.
CalCPA continues to work closely with the CBA as the language is refined to make sure that California CPAs have the flexibility and options to meet their obligations for continuing education.

Check out Capitol Track for more information on these important issues.