Government compounds insult by cheating on tax collections

It’s bad enough that California taxes its citizens more than almost all other states, but adding insult to injury, government entities often cheat on the way that they collect taxes.

This happens in several ways. First, there are times when a government entity knows a tax is illegal but imposes it anyway either hoping no one will notice or knowing they can collect tons of revenue while the issue is resolved in court.  This author’s first experience with governments’ complete disregard of the law occurred 25 years ago in the 1994 case of Hoogasian Flowers v. San Francisco Educational Financing Authority.

In an effort to circumvent Proposition 13’s two-thirds voter approval requirement for special taxes, San Francisco created an entity called an “educational financing authority” for the purposes of imposing a supplemental sales tax. Although the Court of Appeal easily saw through the charade and struck down the tax as illegal, the only remedy that was given was a small refund for the handful of retailers who filed the suit. Thousands of businesses never received relief and the city was allowed to keep millions in illegal tax proceeds.

Taxpayers need to remain aware that government entities at all levels have no incentive to make things easy for taxpayers. Just one recent example involves the L.A. County Recorder’s Office and the implementation of Senate Bill 2, which imposes a $75 tax on documents filed in conjunction with real estate transactions.

There is a specific exemption from the tax for documents recorded for transfers of residential real property to owner-occupiers. Despite this clear exemption, many taxpayers end up paying the tax because the process at the Recorder’s office is unclear. In L.A. County, a man occupying his recently deceased mother’s home was charged $75 to record the notice of her death and another $75 to record the grant deed formally conveying the home from his mother’s living trust to himself. He was willing and able to provide proof of owner-occupancy, but was unable to secure a refund.

Not only do government entities willingly violate the law, sometimes the laws themselves relating to tax collections create a bizarre, byzantine maze of procedures that have many taxpayers throwing up their hands and giving up on asserting their rights.

Just a few of these procedural hurdles include having to exhaust “administrative remedies,” such as appearing at a hearing to protest a tax, the need to file a “claim for refund” before being able to litigate the legality of a tax and the requirement that the tax must be paid first as a condition for being able to challenge it. Compare these hurdles to the ease with which government can come after taxpayers who commit the most minor of mistakes. For example, there is a huge penalty for paying your property tax just a single day late.

This isn’t fair. While it is true that the famed jurist Oliver Wendell Holmes stated that citizens “must turn square corners when dealing with the government,” subsequent courts have stated that government must turn square corners with citizens as well and that government must “comport itself with compunction and integrity,” and not “conduct itself so as to achieve or preserve any kind of bargaining or litigational advantage” over a member of the public. Regrettably, that just isn’t true in California. It is little surprise then that our state ranks 49th out of 50 in the quality of tax administration according to the Council on State Taxation.

What is needed is a new law entitled “Taxpayers’ Access to Justice” which will level the playing field in tax disputes with government entities in California. It is bad enough to pay absurdly high taxes. It’s another to be denied basic due process.

Jon Coupal is president of the Howard Jarvis Taxpayers Association.