ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – IT’S OFFICIAL – YOU MUST FULLY PAY YOUR EDD DEBT BEFORE YOU CAN FILE A CLAIM FOR REFUND
By Robert S. Schriebman 2020
If you wish to file an administrative claim for refund with the EDD, do you have to pay the tax, penalty, and interest portions of your assessment in full for a specific tax year(s) or calendar quarter(s)? Is it possible to pay less?
Most California tax assessments consist of three portions: the tax portion, the penalty portion, and the interest portion. Most of the time, when the word “tax” is used, it was understood that it encompassed all three portions of the assessment. When considering the “pay first, litigate second” rule, how much of the “tax” must be paid before you can file a claim for refund, or get your day in court? The answer is far from clear. This is especially true when it comes to refunds and the litigation of payroll taxes. Employment and withholding taxes are different than income taxes and sales taxes. Income tax is for a specific year, and a sales tax applies to a specific quarter. The US Supreme Court in the Flora case made a distinction when it came to payroll taxes.
U.S. v. Flora
In 1960, the U.S. Supreme Court decided the case of U.S. v. Flora, 60-1 USTC § 9347, 362 U.S. 145, 80 SCt 630 (1960). The Supreme Court held that employment taxes were “divisible taxes,” meaning that each employee and each period involved is a separate matter. In other words, to litigate your case, you need only prepay the employment taxes for one employee for one quarter. This person can be the lowest paid employee. A rule of thumb, the payment of $500 per each quarter in issue is deemed a sufficient payment. Under federal rules, one refund claim form (843) must be filed for each quarter in issue. The EDD and the CUIAB do not have such a rule. There is no Superior Court decision that I have found on this point.
The EDD Full Payment Rule
In 1992, the California Court of Appeals decided the Masi case. An employer wishing to have his/her day in court must pay the EDD assessment in full, before filing a claim for refund. This means that all three portions of the EDD assessment, regardless of how many quarters, must be paid in full. The Masi case paid no attention to the Supreme Court Flora case. (CUIC §1178 and Masi v. Nagle, 5 Cal. App. 4th 608 (1992)).
The Agnew Case
In 1999, the California Supreme Court decided the Agnew case. Agnew v. State Board of Equalization (21 Cal 4th 310, 320). The Supreme Court ultimately held in Agnew that Section 32 of the California Constitution’s pay first requirement applies only to the tax liability itself and not associated interest. The Agnew case should have overruled the Masi case.
The Official Position of the EDD
In December 2020, I had the opportunity to discuss the full payment rule with a member of the EDD’s legal team. We discussed both the Masi and the Agnew cases to determine the official position of the EDD when it comes to making payment prior to filing an EDD refund claim. On December 18, 2020, I received a letter from EDD Counsel stating that pursuant to CUIC § 1178(d), the entire amount of the assessment, plus accruing interest, must be paid in full in order for the EDD to entertain any claim for refund. CUIC § 1178(d) states the following:
“Following a final decision denying a petition for reassessment pursuant to Article 11 (commencing with Section 1221), the employing unit or other person which was a party to the petition may file a claim for refund upon payment of the amount of the assessment, including interest and penalties, and thereafter may pursue all administrative and judicial review rights accorded in Article 11 (commencing with Section 1221) and Article 12 (commencing with Section 1241). (Emphasis added)
The decision in Masi v Nagle addressed this very issue and it remains good law today. The Agnew case, on the other hand, involved the Revenue & Taxation Code, specifically § 6931, that section only mentions the word “tax.” For California income tax and sales tax refund claims, only the tax portion need be paid.
If you file an EDD claim for refund, and only pay the tax portions, your claim will not be considered unless and until everything owed is paid in full.
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 50 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.
Web Site Article 527