Franchise Tax Board Forgets Basic Civics Lesson

Franchise Tax Board Forgets Basic Civics Lesson

There was a time in our nation’s short history when “taxation without representation” was a rallying cry against the abuses of a government unaccountable to the people. While administrative agencies are necessary to facilitate tax procedure, the recent actions of the Franchise Tax Board (“FTB”) prevent a revisionist view of the history of taxation by striking at the heart of each American’s beliefs.

The FTB has unilaterally decided to tax hundreds of California taxpayers through a perverse and fallacious interpretation of a recent California tax case. In August of last year a court held certain provisions of California’s Qualified Small Business Stock statutes–which provide tax incentives for investing in small businesses and startups–were unconstitutional because they gave preference to businesses with a minimum 80% California property and payroll, and in doing so discriminated against interstate commerce. 

The FTB appeared in this case and argued in favor of upholding the law as written. The FTB lost the case against a taxpayer who had invested in California businesses, which fell below the required 80% property and payroll minimums after the taxpayer invested. The Court of Appeal said that the 80% test was illegal. But the court said nothing about the remainder of the statute. The court offered that the State must remedy taxpayers to put those who invested in California businesses “on equal footing” with those who invested in multistate businesses.

With the sting of defeat fresh in their minds, the FTB seized upon an opportunity to grab power and money from California taxpayers. Out of their defeat, like a phoenix from the ashes, rose a new and dangerous policy decision. The FTB would throw out the entire statute, claiming their hands were tied, and would retroactively tax hundreds of California taxpayers who had previously benefitted from the law. 

And, in an attempt to hide from taxpayers that their new policy would confiscate over $150 million from innocent taxpayers, the FTB tried to slide its policy under the radar by issuing its notice the Friday before Christmas, when the attention of the California public was on holiday parties and family-gatherings. Soon after that, surprised taxpayers began receiving assessment notices–some going back to 2008, and for some, the FTB demanded payment of as much as half a million dollars.

Taxpayers and members of the Legislature have expressed outrage over the FTB’s decision to demand taxes from innocent taxpayers who legally benefitted from the existing law. By law, the FTB is not required to issue assessments. Other remedies are clearly available. In 2000, when the U.S. Supreme Court invalidated portions of California’s interest deduction statute as unconstitutional, the FTB did not eliminate the entire statute. Their hands were not tied. Instead, they leveled the playing field by allowing the interest deduction for everyone.

By no means are the FTB’s actions limited to their impact on a few select California taxpayers. These actions violate one of the fundamental tenets upon which our democratic system of government was founded-that there should be no taxation without representation. The members of the FTB are not elected officials. They have no accountability to the California electorate. Their actions set a dangerous precedent for the FTB by allowing them to retroactively tax California taxpayers, any time they crave a money-grab.

The FTB’s decision to unilaterally tax the California populace is made without fear of any ramifications at the ballot box. And while our democratic society touts its ability to spread freedom throughout the world, we must not lose sight of our own territory and the government abuses which would have made our forefathers red in the face. Our forefathers joined together to break free from this tyrannical attitude. 

“Taxation without representation;” it’s happening right here, right now, in California. The time has come for the electorate to band together and demand that their representatives to end the governmental abuse and stop the FTB from imposing retroactive taxes. In the words of our Virginian forefathers, “sic semper tyrannis.”