Archive for the ‘California’ Category

It Was Only a 13.33% Kickback

Sunday, February 7th, 2016

Last year I reported on the case of Ronald Boyd. Mr. Boyd was Chief of Police of the Port of Los Angeles. The ports of Los Angeles and Long Beach are two of the busiest ports in the world, and Mr. Boyd had a nice job. But he saw an opportunity.

In 2011, Mr. Boyd and two other individuals entered into an agreement where Mr. Boyd would receive 13.33% of revenues related to a smartphone app called “Portwatch.” Mr. Boyd guaranteed that the port would adopt the app, and in return for that he got the promise of future revenues. There’s only one problem with that: Mr. Boyd didn’t disclose that. Oops.

Adding to his woes were the future plans of the business: The goal was to take Portwatch and get more money by developing and marketing a similar app called Metrowatch to sell to other government agencies. (The idea of Portwatch is that it would allow ordinary citizens to report crime at the port. In that sense, the app is quite good.) Unfortunately, Mr. Boyd decided that lying to federal investigators was a good idea (it’s not, of course).

Unfortunately, as the investigation into Mr. Boyd continued the government discovered something else:

Boyd also pleaded guilty to tax evasion in relation to his personal income tax return for 2011. In his plea agreement, Boyd admitted receiving income from a security business he operated, At Close Range. The income came from the owner of a company doing business with the Port, American Guard Services, and Boyd admitted that he failed to report that income on his personal income tax returns for years 2007 through 2011.

Mr. Boyd pleaded guilty to making false statements to FBI agents, tax evasion, and a misdemeanor charge of failing to file a tax return (he neglected to file a 2011 tax return for At Close Range). He’ll be sentenced in July.

FTB’s New MyFTB Impresses; Will the IRS Take Heed?

Monday, January 25th, 2016

Submitting a Power of Attorney form to the IRS means I must fax the form to the IRS’s Centralized Authorization File (CAF) unit and hope that the POA is entered in timely. A few years ago authorized e-services providers (which I am) could enter the POAs directly in the IRS system but no more.

Meanwhile, California’s Franchise Tax Board (FTB), the state’s income tax agency, has never allowed California POAs to be entered by practitioners. The procedure was to fax or mail them and wait weeks for them to be entered. No more.

The FTB debuted the new MyFTB on January 4th, and it’s a winner. I signed up, and waited for my PIN to be mailed to me (that took the expected 7-10 days). I then input the PIN, and have access. I can see the accounts I’m authorized for, and the new system allows me to enter a POA.

However, the POA does not immediately go into effect. The FTB requires that a pdf of the POA be attached so that the FTB can review it. The FTB states that within two weeks (well, 15 days) the POA will be in their system.

The FTB’s procedure appears to me to allay the issues that the IRS had with rogue professionals entering POAs without authorization. And consider the time savings here. I’ve entered all the information into the FTB’s computer system. An FTB employee can match the pdf I uploaded to the POA I entered. If it matches, the employee can make my POA go live. He or she doesn’t have to retype the information I entered, saving the FTB time (and money). The POA gets into the FTB’s systems faster, making me happy (and my client). It’s a win-win.

There’s a lot more that’s doable with the FTB’s new MyFTB. I can look at account balances, estimated payments amounts (clients get these wrong all the time), 1099 information on the state level (IRS wage and income transcripts don’t have this information), calculate a balance due for a future date, protest an assessment, view images of notices and correspondence, and more.

If you’re a tax professional who deals with California clients or a California taxpayer, I urge you to enroll in MyFTB. I’m very impressed. I may rag on the FTB (especially in the enforcement area) but from my point of view MyFTB is a model to be emulated by the rest of the country.

Such a system, if implemented by the IRS, would also be a win-win. Unfortunately, my expectations on that end aren’t particularly high. Indeed, I’ll be surprised if we see such a system for the IRS in the next five years.

Lawsuit Filed Over BOE’s Fixer-Upper

Sunday, January 17th, 2016

I’ve reported on California’s Board of Equalization headquarters building in Sacramento on two occasions. It seems some employees of the BOE aren’t happy at all, and have filed a lawsuit against the BOE alleging that the agency has known for years that the building is a health hazard.

While the BOE has publicly stated that the building is safe, there have been a few “minor” problems. Like glass windows randomly falling to the ground. Given the building is 24 stories tall, you may want to walk on the other side of the street if you’re ever near it. There’s also a few pipes that have corroded; back in 2012 that was only in the waste lines. The elevator doors have this tendency to stay closed when you want to exit the elevators. There was also that infestation of bats.

But the big issue for the lawsuit is toxic mold. Those windows that randomly pop out have done so supposedly because of bad seals. That leads also to water entering the building. Sacramento’s summers are very warm, so that water leads to mold. The lawsuit alleges that the BOE knew back in 1995 (two years after the building opened) that mold was an issue leading to all sorts of illnesses.

It will likely be years before the lawsuit makes its way to trial.

FTB Wins Gillette Appeal

Friday, January 1st, 2016

California’s Franchise Tax Board won the appeal of Gillette v. Franchise Tax Board. This opinion covers taxation of multi-state entities in California prior to 2012.

Gillette (and several other companies) argued that the FTB’s weighing of the “sales” factor higher than other factors was discriminatory based on a multi-state compact. (California specifically withdrew from the compact for years after 2011.) The California Supreme Court decided that the FTB’s interpretation of the California legislature is accurate.

Gillette and the other appellants can file a writ of certiorari to the US Supreme Court; however, this does not appear to be the kind of case that the US Supreme Court would take.

My Love/Hate Relationship with the FTB

Tuesday, December 1st, 2015

For those who don’t know, I used to reside in California. I prepare more California tax returns than any other state’s returns (though it is no longer a majority–or even close to a majority–of my clients). I have a lot of experience in dealing with California’s income tax agency, the Franchise Tax Board.

The FTB, like the IRS, has a practitioner priority service. And you actually get through to humans when you call the number. Though not available on the FTB’s practitioner line, several FTB numbers have “call back” service. The recording tells you how long the average wait time is (e.g., between 45 minutes and 72 minutes), and you can elect to wait on hold or enter your phone number and the system will call you back when it’s your turn to be first in the queue. The system has one “flaw”: I’ve been called back faster than the average wait time.

The FTB also has an annual meeting with the California Society of Enrolled Agents (CSEA). The FTB posted in its December Tax News how to deal with partial year dispositions and late partial disposition elections for tax years 2012-2014.

Yet for all the excellence in how the FTB communicates some of the FTB’s practices leave a lot to be desired. Back in 2013, the FTB invented law related to qualified small business stock. The FTB was convicted of committing fraud and intentional infliction of emotional distress in the Gilbert Hyatt matter. This case will be heard for the second time at the US Supreme Court next week. The Hyatt case is just one example of what appears to me to be the normal FTB strategy: Delay cases and make things as expensive as possible for litigants.

And the FTB has also been persnippity and literal at times. You definitely want your paperwork to be exactly right when dealing with them. So you have to take the bad with the good when dealing with the FTB.

The Turf Monster Striketh

Friday, November 20th, 2015

Every so often the turf monster trips a player in a football or baseball game. Here’s one example:

This post deals with a very different kind of turf monster. Back in September I wrote about Southern California’s Metropolitan Water District issuing “rebates” to homeowners for replacing lawns (turf) with xeriscapes. It’s clear that such “rebates” are taxable for federal tax purposes. (California law specifically exempts such “rebates” for California tax purposes.)

Apparently, the Electric and Gas Industries Association (EGIA), which ran the program for the MWD, just discovered this. A correspondent sent me an email he received:

Dear Soon to be Taxed Homeowner:
Our records indicate that you received a rebate that exceeded $600 from SoCal Water$mart in 2015. In order to comply with Internal Revenue Service requirements you must complete and sign a W-9 form with your Social Security number or Tax ID. This form is available within the online application, and may be accessed by logging into your online account at and editing the application with the required tax information changes. The name on the W-9 form submitted for review must match the name that was on the rebate check…

Please log back into your online account at, download and complete the W-9 form and upload the completed form back into the application. The W-9 will be reviewed, and a 1099 will be issued to you for tax and accounting purposes. If you have any concerns regarding whether your rebate is considered taxable income, please contact a qualified tax professional.

There are two obvious implications of this. First, the EGIA realizes that they must issue 1099s to any impacted taxpayers. It’s another case of substance over form: These may be called “rebates” but they’re really an economic incentive to remove turf and replace it with something else. And that results in what is clearly taxable income.

Second, there will probably be an issue with some taxpayers ignoring the email. The email notes that you’re going to be issued tax paperwork; how many taxpayers will want that? Of course, whether or not the 1099 is received does not change that the income is taxable (it is). Still, I suspect EGIA will have quite a bit of work on their hands to obtain all the taxpayer identification numbers.

UPDATE: My correspondent told me that the EGIA is requesting that impacted taxpayers email their taxpayer identification numbers to the agency. If you are an impacted taxpayer, do not do this. Email is fast but it is not secure. EGIA is allowing you to mail the Form W-9 to the agency; that is a far more secure means of transmitting your social security number.

To the EGIA, what were you thinking in these days of identity theft?

Yes, Two States Rank Lower than California

Tuesday, November 17th, 2015

It’s not all bad news in the Tax Foundation’s 2016 State Business Tax Climate Index for California. You could always be in New York or New Jersey. Still, it’s better to be elsewhere.

Two excerpts from the article note why states rank at the top of the list or at the bottom:

The absence of a major tax is a common factor among many of the top ten states. Property taxes and unemployment insurance taxes are levied in every state, but there are several states that do without one or more of the major taxes: the corporate income tax, the individual income tax, or the sales tax. Wyoming, Nevada, South Dakota, and Texas have no corporate or individual income tax (though Nevada and Texas both impose gross receipts taxes); Alaska has no individual income or state-level sales tax; Florida has no individual income tax; and New Hampshire and Montana have no sales tax…

The states in the bottom 10 tend to have a number of afflictions in common: complex, non-neutral taxes with comparatively high rates. New Jersey, for example, is hampered by some of the highest property tax burdens in the country, is one of just two states to levy both an inheritance tax and an estate tax, and maintains some of the worst-structured individual income taxes in the country.

So who are the winners and the losers? Here are the top ten states:

1. Wyoming
2. South Dakota
3. Alaska
4. Florida
5. Nevada
6. Montana
7. New Hampshire
8. Indiana
9. Utah
10. Texas

Here are the bottom ten states:

41. Maryland
42. Ohio
43. Wisconsin
44. Connecticut
45. Rhode Island
46. Vermont
47. Minnesota
48. California
49. New York
50. New Jersey

My home state, Nevada, does very well (ranking fifth overall). It ranks first in individual income tax (there isn’t one), fourth in corporate tax (there is no a gross receipts tax on businesses, but only large businesses and the tax rate is low), seventh in property tax, but 39th in sales tax and 42nd in unemployment insurance tax.

Note that it is possible to have every major tax and still rank highly (Indiana and Utah manage that) if the taxes are broad with low rates. Of course, you can be like New Jersey, New York, and California: have broad taxes at high rates. If you do that, you end up on the bottom.

I should point out that it is possible that New York will rise in the rankings. As the Tax Foundation noted, New York enacted corporate tax reform which should improve its standing. Meanwhile, California is apparently considering more and higher taxes for the future. That, combined with the regulatory environment in the Bronze Golden State, should give legislators pause…but probably won’t.

Wrong Font Size Costs 30 Employees Their Jobs in Chico, California

Tuesday, November 17th, 2015

I had never heard of Woof & Poof. The company makes handcrafted baby products, but apparently not for long in their home of Chico, California. According to this news story, the company is stopping production.

Why? The CEO, Roger Hart, said, “The high cost of doing business in California coupled with ridiculous regulatory environment makes it virtually impossible to do business.” The news story contains the following:

A recent visit by an inspector with the Department of Consumer Affairs set the company back. The inspector from Sacramento cited him for having the wrong size font on the decorative pillow labels. He was told to take the labels out, or they would have his inventory seized.

My next story (above) notes California’s low standing on the 2016 State Business Tax Climate Index. California’s standing in the regulatory realm is even lower.

About 9,000 Businesses Left California During Good Economic Times

Tuesday, November 10th, 2015

Yesterday a friend sent me a link to Joseph Vranich’s report on businesses leaving California. I should know: I’m one of the 9,000 businesses that did so.

Mr. Vranich analyzed business relocations from 2008-2014. He identified 1,510 “disinvestment events”–companies leaving the Bronze Golden State for brighter horizons. Mr. Vranich notes that for every one company that publicly leaves, at least five others have left. Mr. Vranich also excluded all but primary employers,

…[W]hose customers are nationwide or worldwide (such employers bring wealth into a community.) All “secondary employers” (which exchange wealth already in a community) such as retail stores, restaurants, dry cleaners, beauty salons, nurseries – an inexhaustible list of enterprises – are excluded.

While some of these business closings and relocations are local businesses that just service locally, today with the Internet a business in Nevada and elsewhere can service clients anywhere in the world. Yes, you can only go to a restaurant locally or get your hair done where you are, but many other service businesses are no longer geographically constrained. This, too, likely causes an understatement of the impact of business relocations.

And things aren’t likely to get better for California:

Finally, California is considering imposing a broad set of new taxes, tax extensions and fees on businesses in 2016 and 2017 – a “tsunami” that may trigger the worst demands on private-sector finances ever organized by the state’s politicians. It is highly likely that one result will be an increasing number of disinvestments in California in favor of greener domestic or international pastures.

A factor that Mr. Vranich didn’t consider is what will happen during the next economic downturn? California today relies largely on capital gains taxes from very wealthy individuals (and individuals receiving stock options) for state revenues. The next time there’s an economic downturn, that source of income will decline, almost certainly very substantially. Given the mindset in Sacramento, that’s likely to result in even higher taxes and regulations rather than starting to actually make California a place that businesses want to locate in.

California DMV Deliberately Overcharging on Sales Tax

Thursday, October 29th, 2015

When you purchase a car in California, you owe sales tax based on where the car is registered. The California DMV uses a table based on ZIP Codes to determine what that should be. For 90% or more of California, it works fine; the sales tax rate in a ZIP Code is uniform.

However, California has numerous sales tax rates based on cities, counties, and special districts. Two individuals living in the same ZIP Code might have two different sales tax rates. The DMV has apparently programmed its computer to charge the higher of the two sales tax rates when registering a car purchase. An impacted consumer has to then apply for a refund (if he becomes aware of the issue).

Yet California’s Board of Equalization, the agency responsible for sales tax collection in California, developed an online tool to accurately show the sales tax rate for a location. Unfortunately, the DMV refuses to use it and told George Runner, a member of the BOE, that it would be several years before the problem is fixed.

Mr. Runner expresses surprise at the situation.
I am anything but surprised. I suspect the DMV likes the current procedure because they show higher revenue generation (which will presumably increase their budget) and because of pride of ownership. ‘We can’t use a tool developed by the BOE,’ the DMV may be thinking. ‘It’s not ours, so how can we trust it? And it doesn’t directly interface with our computer system. We don’t want our clerks overriding a sales tax rate (even when it’s wrong). Let the consumer just apply for a refund.’

This is yet another reason why trust has fallen in government and regulators.