Ask The California Employment Tax And Payroll Tax Attorney – How Long Can You Rely On Written Advice From Any California Taxing Agency
By Robert S. Schriebman
2020
Introduction
How long does a written opinion from a California taxing agency last? For example, may a sales tax auditor’s written opinion on an audit issue in one year, allow you to take the same position on tax returns in the future? This was the precise issue facing a California company when it used the same ratio of taxable sales on future returns. The question at hand is much broader than the California sales tax. Written opinions given by the EDD and the FTB subject taxpayers to the same questions. In March 2020, a retailer of office printers and copiers who also sold optional maintenance contracts filed a petition for rehearing before the Office of Tax Appeals (OTA) challenging assessments for sales taxes. Pursuant to maintenance contracts, the taxpayer provided its customers with repair or replacement parts required to maintain printing equipment. Part of these supplies consisted of ink and toner subject to sales tax.
The company was audited by the then SBE several times. In the first audit it had virtually no books or records, and had to estimate the percentage of charges for ink and toner as they were subjected to sales tax. The estimate was 10% of total charges. The SBE agreed to the estimate, and put it in writing that that 10% was considered reasonable and accurate. In subsequent years, the taxpayer reported the same 10%, but the SBE said it was too low, and assessed substantial back sales tax. The taxpayer, Image 2000, challenged the assessment before the OTA. A hearing was held on February 4, 2020. The OTA ruled in favor of the SBE. In March 2020, Image 2000 petitioned for a rehearing on the grounds that it had a right to rely upon the original 10%, per the written opinion, in perpetuity.
This article will discuss the Image 2000 rehearing proceedings for two specific purposes:
A. What are the grounds for allowing a rehearing?
B. How long may one rely on a written opinion or a position from a taxing agency?
For further reference see the Appeal of Image 2000, 2020-OTA-271
What Are The Grounds For an Administrative Rehearing?
Administrative agencies in California basically use the same grounds for granting a rehearing:
A. An irregularity in the proceedings that prevented the fair consideration of the appeal;
B. An accident or surprise that occurred, which ordinary caution could not have prevented;
C. Newly discovered, relevant evidence, which the filing party could not have reasonably discovered and provided to issuance of the written opinion;
D. Insufficient evidence to justify the written opinion or the opinion is contrary to law;
E. An error in law that occurred during the proceedings; or
F. A ground for a rehearing is material if it is likely to produce a different result.
In the Image 2000 matter, the OTA determined that the company’s economics had changed and that its costs for toner and ink had increased to the point where it exceeded 10% of sales. Therefore, the prior written “OK” that governed an earlier audit no longer applied to subsequent periods under audit.
How Long May One Rely on a Written Opinion or Position from a Taxing Agency?
The issues of reliance on taxing agency opinions are usually found in regard to the abatement of penalties. For example, in the Internal Revenue Manual (IRM), Chapter 20, it states that penalty relief is allowed for the reliance on both erroneous written and oral advice. California, on the other hand, does not give a taxpayer a pass for reliance upon oral advice. Taxpayers seeking reliance for future positions taken on tax returns, usually obtain a private letter ruling from the IRS or similar written positions from the FTB and the EDD. For example, a company may seek a written ruling from the EDD that workers may be properly classified as independent contractors.
The OTA, in the Image 2000 matter, quoted a California Regulation, Cal. Code Regs., tit 18, § 1705(c), that stated ,” in order for written advice contained in a prior audit to apply to the person’s activity or transaction in question, the facts and conditions relating to the activity or transaction must not have changed from those which occurred during the period of operation in the period audit.”
No taxpayer is allowed to rely upon an opinion in perpetuity if the business model changes materially. In other words, if the costs of taxable materials increase, and that increase is passed on to the consumer, thus generating higher gross sales, the original cost ratios no longer apply.
Conclusion
It’s clear nothing last forever. A written position sanctioned in a prior audit is always subject to change. Our economy over the years has shown that nothing is set in stone. I have always been uncomfortable when it comes to reliance upon oral advice. I always keep in mind the immortal words attributed to the late Samuel Goldwyn of MGM, “An oral contract is not the paper it is written on.”
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Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 40 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD and he is not employed by the EDD or any other agency of the State of California.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
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