California's Board of Equalization (BOE) is the only elected tax board in the U.S. Its five members’ positions are ensured by the state constitution. They and their staff of nearly 4,500 collect the state's sales and excise taxes, oversee county property tax assessment, determine the market value of public utility and railroad property, and hear appeals on these taxes plus the income and corporate tax. The BOE collects more than $48 billion in taxes and fees. The members' status as politicians rather than bureaucrats has made the board more proactive in shaping policy than many other state agencies. In 2011, for example, the BOE was at the forefront of the debate over subjecting online retailers to the use tax, right beside lawmakers.

California Board of Equalization Announces that Service Businesses Must Pay Use Tax (Building Owners and Managers Association)

The first state Board of Equalization was created in 1870, but soon defanged by legal challenges. California's Supreme Court ruled that its two unelected members' authority over tax assessment was unconstitutional. The current Board of Equalization, with four elected members in addition to the state controller, was formed as part of the revised constitution in 1879.

The property tax, and the requirement that it apply to all land equally, had been law since the state's formation. The board's chief aim in its early years was enforcing that law in the face of abuse, ensuring that the county assessors acted fairly and uniformly. It was the Legislature's particular hope that the board would succeed in subjecting the powerful and land-rich railroad companies to their full tax burden.

Over time, the BOE's authority expanded to include assessment or collection of new taxes: on gas, cigarettes, jet fuel and others. In 1929, the Office of the Franchise Tax Commissioner formed to administer the new bank and corporation taxes. It was later assigned responsibility over income tax, and became the separate Franchise Tax Board, California's second major tax agency, in 1950. The BOE continues to hear appeals of its rulings.

From the end of Prohibition in 1933 until the passage of a constitutional amendment in 1954, the BOE was also responsible for licensing and controlling the sale of liquor. The board and its staff did not excel at this duty, which fell within its purview only insofar as it managed the alcohol tax.

Before the public voted the Department of Alcoholic Beverage Control into existence, Board Member William Bonelli faced repeated accusations of misconduct in liquor licensing matters. Bonelli failed to retain his office in the same election that relieved the BOE of authority over alcohol sales, and fled to Mexico to escape trial.

The Bonelli scandal was not the last in the BOE's history to end in indictment. In the 1960s, investigators discovered tax assessors across the state undervaluing property and, occasionally, taking bribes. Several assessors were brought to trial, and a reform bill passed in 1967 directing the board to become more involved in regulating county assessment practices, disallowing property appraisal by interested parties and instituting a 25% assessment ratio.

That assessment ratio (according to which someone with a $400,000 home would pay taxes on $100,000) drove up property taxes. By stripping tax assessors of all powers of discretion to ensure fairness, everyone ended up paying more. By the late 1970s, California's property taxes were about 50% above the norm.

In 1978, Californians passed Proposition 13, capping property taxes at 1% of assessed value and limiting assessment increases to the lower of 2% or the rate of inflation. The success of the campaign ushered in a “tax revolt” in which similar measures appeared on ballots across the country. Described as the “third rail” of California politics, Prop. 13 put an end to a century of contention over property taxes and, despite its detractors, it remains in effect to this day.

Since almost everyone holds a stake in taxation, the Board of Equalization continues to grapple with controversy—most recently over use tax on online sales (the “Amazon tax”). While taxes themselves are in constant flux, the structure of the board, its realm of authority, and the laws governing it have remained largely the same since the creation of the Department of Alcoholic Beverage Control in 1954.

The First 100 Years: 1879-1979 (by Steven P. Arena, BOE website)

History & Milestones of the State Board of Equalization (BOE website)

Scandal in California (by Warren James Bow, National Civic Review, John Wiley Online Library)

Proposition 13 and the Transformation of California Government (by Jack Citrin, California Journal of Politics & Policy) (pdf)

The Board of Equalization administers sales and use taxes, property taxes, and “special taxes and fees”—i.e., environmental protection fees, cigarette and alcoholic beverage taxes, and gas taxes. There are several taxes within each category. The BOE's 2009-2010 annual report lists 33 taxes and fees in all.

The board enforces its authority by licensing or permitting relevant businesses and investigating potential violations. In its capacity as a quasi-judicial body, it hears appeals of its assessments and those made by the Franchise Tax Board, which collects corporate and income taxes. (California's third tax agency, the Employment Development Department, manages unemployment and disability insurance taxes. Appeals are heard by the dedicated Unemployment Insurance Appeals Board.)

The BOE continues to fulfill its two earliest responsibilities: overseeing county assessors to ensure uniform property taxation, and assessing public utilities' and railroad companies' property through the State-Assessed Properties Program.

The board collects both local and state sales and use taxes, including district taxes of as much as 1% levied to pay for amenities like public transportation. (The first of these was instituted to fund the Bay Area Rapid Transit system in 1970.) It then distributes local taxes to local government through the Allocation Group, less charges for their administration.

A variety of BOE programs aim to alleviate the economic burden for some in the name of the greater good. There are property tax exemptions for low-income households, veterans and owners of historic buildings, among others. The Tax Appeals Assistance Program provides legal assistance for those appealing income or use taxes who couldn't otherwise afford it, tapping law students as cheap advocates.

Like most California agencies, the BOE also publishes reports and statistics about its operations. It hosts enough outreach events, educating the public about tax procedures, to have a dedicated Speakers' Bureau to process appearance requests. And it operates the Taxpayers' Rights Advocate Office, which serves more as customer service center than watchdog, providing the opportunity for taxpayers to, in the website's words, “call to communicate their frustration with aspects of the business or property taxation system or [to seek] confirmation that they have been treated lawfully and fairly by a county or state office.”

Taxes and Fees Administered by the California State Board of Equalization (2009-2010 annual report, BOE website) (pdf)

District Taxes, Rates, and Effective Dates (BOE website) (pdf)

The Board of Equalization spends the majority of its money (and uses more than 3,000 employees) administering the sales and use tax. It retains about $12 million each quarter in local sales and use taxes as administrative costs, and charges other state agencies for tax-related services, making government a larger stakeholder in its operations than its individual contractors.

In the first three quarters of 2011, the BOE paid a lawyer, an information technology consultant, the producer of California's cigarette tax stamps and several IT vendors between $1 and $5 million apiece. Only Hygiene Technologies International, charged with investigating the mold infestation at the BOE's central office, and the Department of Motor Vehicles, which collects sales taxes on the BOE's behalf, were paid more, at $13 and $7 million, respectively.

The state General Fund supplies more than half the board’s budget and most of the rest is from local government reimbursements.

The board's power to assess property, rule on appeals and enforce (or ignore) taxation policies gives it far-reaching influence. The public utility and railroad companies, whose property the board sets the value of directly, and businesses subject to special excise taxes, such as alcoholic beverage and cigarette sellers, are particularly invested. Native American tribal nations, as locally sovereign and hence (mostly) untaxable by the state, also have a strong interest in the BOE's interpretation of the law. The board's declaration that a gas station on a reservation must charge use tax to buyers who do not live on that reservation, for example, may substantially hurt those stations' business.

Top 10 Contractors: The Board of Equalization reports that its largest service contractors in 2012 were:

3-Year Budget (pdf)

Local and District Taxes (BOE website)

Board of Equalization Fights to Break the Mold (by Michael Panush, Capitol Weekly)

Tribes and Gaming Roundup (by Malcolm Maclachlan, Capitol Weekly)

Campaign Contributions and the Board

In a five-part series by Laura Mahoney, the Daily Tax Report (a BNA publication) made a direct correlation between campaign contributions to board members and the outcome of cases argued before the panel. The August 2010 stories made no allegations of illegal contributions, but its examination of 70 “complex, high stakes” cases between 2001-2009 revealed a striking pattern: the more money contributed to a board member, the higher likelihood of success.

The 20 cases that had $250 or less attached to them were successful about 30% of the time. The 17 cases with $250-$16,000 attached were successful 53% of the time. The next group of 16, at $16,000-$50,000, won 75% of the time and the last group of 16 big spenders had an 88% success rate to show for their $50,000-$137,000 contributions.

Five political action committees (PACs), which took money from people involved in the 70 BNA cases, were responsible for $681,701 of the $1.06 million in contributions tracked by the publication. Two of the PACs were controlled by PricewaterhouseCoopers and a third by California Credits Group; they almost exclusively donated to the board. 

PricewaterhouseCoopers was the most active contributor, showing up in 36% of the 70 cases studied. Its clients and client employees accounted for 46% of the contributions directly tied to specific taxpayers and companies.        

Former U.S. Senator John Tunney, who had a case before the board in 2007 and contributed money to each of its members, told BNA, “I knew I had a well-developed case. All I wanted was to get someone on the Board of Equalization to pay attention and this was the only way to get it.’’

Campaign Contributions and the California State Board of Equalization (by Laura Mahoney, Daily Tax Report)

Press Clips: One Woman I-Team Sacks Tax Board (by Jean Ross, Calbuzz)

Bribery and Malfeasance Among Tax Officials

Constituents nationwide are used to seeing their misbehaving representatives formally reprimanded, fined or forced to resign. California's Board of Equalization is an overachiever in this regard: two of its former members actually fled the country in attempts to escape prosecution and several of the county assessors it supervises have been incarcerated.

William Bonelli was first charged with taking payoffs from saloonkeepers in 1939. He and four others were acquitted, and the high-profile trial didn't keep him from being reelected three more times. It wasn't until after 1951, when Bonelli testified before a U.S. Senate committee about his alleged ties to organized crime, that the voters denied him another term. After his arrest in Arizona, Bonelli fled to Mexico and successfully fought against extradition. He died there, still a fugitive, in 1970.

Paul Carpenter was less fortunate in his attempt to evade prosecution. Carpenter served on the Board of Equalization for less than a full term before leaving office in 1990, convicted of federal charges. In his previous job as a state senator, he'd accepted campaign contributions in exchange for legislation favorable to a shrimp processing company serving as a front for the FBI. "Shrimpscam" led to five years in prison for Carpenter after his extradition from Costa Rica, as well as convictions for four other officials. But before he fled, he sent a letter to U.S. District Judge Edward Garcia explaining his dilemma: “I find my drive for survival stronger than my sense of obligation to your legal system.”

The county assessors' offices have had their own scandals, including a series of bribery and malpractice problems in the 1960s and more recent charges that Bill Postmus ran a private political campaign with San Bernardino County resources, took bribes and used methamphetamines. The 60s assessors' scandal led to several convictions and a major reform bill. Postmus resigned from his position as county assessor in 2009 and pled guilty in 2011 to 15 violations, including three felonies.

Onetime 'Liquor Czar' Ended Life a Fugitive (by Cecilia Rasmussen, Los Angeles Times)

Paul B. Carpenter (Join California)

Scandal in California (by Warren James Bow, National Civic Review, John Wiley Online Library)

Bill Postmus (Total Capitol)

Tax Scofflaws

In 2007, despite cries of privacy invasion, the Franchise Tax Board (income tax) and the Board of Equalization (sales and use taxes) each began publishing a list of their largest tax scofflaws. The FTB updates its list annually and the BOE freshens its list every quarter. As of February 14, 2012, the listed FTB debtors owed a total of $122.9 million. They make the list when a tax lien is filed by the state.

The BOE published a list on March 2, 2012, of the top 500 tax delinquents with accounts of more than $100,000. The total of their delinquencies came to $555.7 million. The leading scofflaw, California Target Enterprises Inc. ($18.4 million), is essentially the same entity as #3 on the list, Gary Lazar ($11.1 million) and one farther down the list, Pronto Marketing Company ($987,706). Liens against the properties have been on the books since 2002.

All three are listings for Gary and Divine Grace Lazar, whose rap sheets date back to at least 1992 when the Anaheim Hills couple were arrested on charges of contaminating soil and ground water with gasoline from leaky storage tanks beneath some their 200 gas stations. Both went to jail after it was determined they had doctored gasoline, faked tests on their leaky gas tanks and failed to pay $25 million in state sales, gas and cigarette taxes. The doctored gasoline was a mixture of kerosene, diesel and gas that apparently damaged thousands of vehicles.

The Lazars were sentenced in February 1995 to 8.5 years in state prison. They were also separately indicted by the federal government in 1996 for bankruptcy fraud for which Gary Lazar was sentenced to 51 months in jail and Divine Grace Lazar received a 21-month sentence. By then, the couple had divorced.

Over the years, the Board of Equalization has received $5.3 million from 40 taxpayers who came forward to take care of their debts since it started publishing the scofflaw list. Indebted taxpayers are notified 30 days before the lists are published.  

O.C. Couple Arrested in Hazardous Material Case (Los Angeles Times)

Adulterated-Gas Dealer Sentenced in Finance Fraud (by James S. Granelli, Los Angeles Times)

Woman Receives 21-Month Sentence for Fraud (by James S. Granelli, Los Angeles Times)

State Tells Delinquent Taxpayers to Pay Up (by Joanna Lin, California Watch)

Top 100 Delinquent Taxpayers Owe $419M (by Sam Pearson, California Watch)

Largest Sales & Use Tax Delinquencies in California (Board of Equalization website)

Tax law—even just the segment of it administered by the Board of Equalization—is in constant flux to compensate for changes in the economy and in taxpayer and government needs. Recently, policymakers and media have debated the merits of potential higher taxes on commercial property and of severance taxes on oil. Taxpayers have demanded and achieved reform of the Qualified Purchaser use tax program to make it more user-friendly. And reports that tax incentives for businesses in "enterprise zones" are not creating jobs have lead to a reexamination of those incentives.

As of mid-November in the 2011-2012 legislative session, the BOE had formally analyzed over a hundred bills relevant to its operations. Among the myriad smaller changes to the tax code considered every year, a few proposed reforms stand out for their persistence or audacity—or both.

The first is to get rid of the BOE altogether. The recommendation was made as early as 1929, when a government commission opined that a smaller board of gubernatorial appointees would better serve California's needs. And this was before the separation of the Franchise Tax Board created concerns about inefficiency and redundancy in the tax system. At least 40 calls to eliminate the board, creating a combined Department of Revenue or simply eliminating the BOE's idiosyncrasies in favor of something else, have been made over the years. The most recent comes from reporter Dan Walters. “It's simply ludicrous that the administration of taxes is dependent on the ideological whims and personal agendas of five politicians,” Walters writes.

The second is to expand sales and use taxes to include services as well as physical goods. The Legislative Analyst's Office notes that spending on services has increased over time, making the sales and use tax “less reflective of total spending than it once was.” According to a report from the Center on Budget and Policy Priorities, California could increase its sales tax income by about 40% by adopting a broad tax on services. The service tax question is being considered all over the nation.

The last, and perennial, proposed reform of the BOE is bridging the “tax gap”—the disparity between taxes owed and taxes paid. Uncovering failures to collect sales and use tax can be difficult, because audits may not reveal those based on employee fraud, and many businesses are fully compliant. In 2008, the Legislative Analyst's Office recommended against giving the BOE funds for a proposed audit improvement program, citing a low benefit-to-cost ratio. In the face of difficulty tracking down tax evasion from the outside, lawyer Erika Kelton publicly called for a whistleblower program to receive tips from within businesses in 2010.

All Legislative Analyses 2011-2012 Session (BOE website)

The First 100 Years: Martin Commission Recommends the Abolition of the Board of Equalization (by Steven P. Arena, BOE website)

Reforming California's Tax System (Legislative Analyst's Office) (pdf)

Do You Want a Tax With That? (by Pamela M. Prah, Stateline.org)

Expanding Sales Taxation of Services: Options and Issues (by Michael Mazerov, Center on Budget and Policy Priorities) (pdf)

Analysis of the 2008-2009 Budget Bill: Board of Equalization (Legislative Analyst's Office)

Opinion: Bridge the Tax Gap: Bring in the Whistleblowers (by Erika Kelton, op-ed, Capitol Weekly)

The BOE vs. Amazon

In 2011, California moved to require online retailers, including Overstock.com and the oft-cited Amazon, to collect use tax on its sales to California residents. The use tax was already owed on products purchased from out-of-state: it's a tax, equivalent to sales tax, on merchandise bought elsewhere for enjoyment within the state. Consumers are legally bound to report such sales and pay taxes on them, but less than 1% do, and the policy is not enforced.

In January, Assemblymember Nancy Skinner introduced legislation to require companies with online affiliates—people who advertise links on their websites in exchange for a percentage of sales generated—and subsidiaries in California to collect use tax themselves. The Board of Equalization was split along party lines, with Democratic Chair Jerome Horton calling Amazon “morally wrong” for resisting the tax while Republican member George Runner spoke out harshly and repeatedly against the measure.

California was not the first to address the online tax issue. New York and Colorado both passed similar laws, and faced legal battles over them. But since California represents 20% of Amazon's market, the battle there was particularly fierce.

When Governor Jerry Brown signed the bill in June, Amazon followed through on its threat to discontinue its affiliate relationships and started collecting signatures for a referendum on the law. Some California consumers launched a boycott in response.

In September, Governor Brown signed a compromise, repealing and replacing the original legislation. The BOE would wait for a year to enforce the tax, and Amazon would drop the ballot initiative and build distribution centers, and thus jobs, in California. The Amazon affiliates were reinstated. Until September 2012, retailers can continue to lobby the federal government for clarification on the issue, which would keep the California law from going into effect. The Legislative Analyst's Office had recommended that the state “encourage Congressional action” in its February report on the use tax.

Amazon Tax Dispute Puts California in the Spotlight (by Dale Kasler, Sacramento Bee)

California's Out-of-State Sales Tax (TheGoodBuy.net)

Gov. Jerry Brown Signs Amazon Sales Tax Collection Law (by Marc Lifsher, Los Angeles Times)

California's Use Tax (Legislative Analyst's Office) (pdf)

Pro Use Tax Collection

The biggest argument for enforcing the tax is, as Horton said, moral. Taxpayers, legislators and retailers associations argue that implicitly tax-free Amazon prices represent a competitive edge over brick-and-mortar stores that isn't fair. Amazon is greedy, they claim, to refuse to level the playing field, given its already competitive business model. Some also point out that online shopping, and thus cheaper prices, are disproportionately available to people with higher incomes.

The collection measure came up in addressing the state's latest budget crisis, when the potential financial benefit—estimated at $200 million in revenue by the BOE—was particularly attractive. Under the title "Fewer Books, More Potholes," blogger William Petrocelli explicitly weighed Amazon's uncollected taxes against the services under the knife in the budget negotiations.

Proponents of the collection law claimed that, without the tax incentive to keep physical sales operations out of the state, Amazon would expand operations and create jobs in California. They were, to a certain degree, vindicated when the compromise included a promise from the company to do just that.

Lastly, while some of the discontinued affiliates blamed the state for instigating the conflict, others felt that Amazon was mistreating them. Blogger and affiliate Danny Sullivan wrote an open letter to Jeff Bezos, Amazon's CEO, objecting to being made a political “pawn” with less than a day's notice, and noting that, without tracking down and deleting links to Amazon, they'd continue to drive traffic that the company would capitalize on. After being reinstated, Sullivan noted that the sales data for his downtime as an affiliate was available, but the payout of his percentage was not.

Giving the Use Tax Teeth: Leveling Amazon's Playing Field (by Brian Leubitz, Calitics)

Fewer Books, More Potholes (by William Petrocelli, Book Passage)

An Open Letter to Jeff Bezos on Terminating the Amazon Affiliate Program in California (by Danny Sullivan, Daggle)

Amazon Welcomes Back Its California Affiliates (by Danny Sullivan, Daggle)

Anti Use Tax Collection

Many of the arguments against requiring retailers to collect the use tax and for Amazon are point-by-point inversions of the arguments for requiring collection and against Amazon (and vice versa). Opponents of the policy accuse the state of greed, say that collecting use tax will cost California jobs and blame the state for the discontinuation of the affiliate program. Runner called the state the “greediest actor” in the debate and repeatedly predicted that the government would actually lose money on the policy as affiliates and other small businesses failed.

Bezos and others have additionally argued that the policy is illegal. In 1992, the U.S. Supreme Court required that a company required to collect taxes by a state must have a “physical presence” in that state, or run afoul of interstate commerce laws. While the question of whether affiliates constitute a physical presence is still under litigation in New York and elsewhere, Bezos claims the measure is unconstitutional. Despite Amazon's agreement to comply with the new legislation, Runner remains concerned about job losses and the cost of potential litigation: “Absent a federal solution, which is highly unlikely in such a short time frame given all of the competing interests, we’ll be right back in the same mess in a year.”

Amazon Tax: Good, Bad and Ugly (by Robert W. Wood, Forbes)

Gov. Brown Signs Dubious Amazon Bill (by John Seiler, Cal Watchdog)

Go Ahead, Boycott Amazon.com (by John Seiler, Cal Watchdog)

Government Is Greediest Actor in "Amazon Tax" Debate (by George Runner, BOE website) (pdf)

Amazon Drops California in Growing e-Commerce Affiliate Tax Law War (by Velvet Blue, ZDNet)

Judy Chu, 2008

Betty T. Yee, 2007 and 2009-2010

Carole Migden, 2003-2004

John Chiang, 2002 and 2004-2006

Claude Parrish, 2001

Dean Andal, 1998 and 2000

Johan Klehs, 1995-1996 and 1999

Brad Sherman, 1991-1994

Paul Carpenter, 1989

Conway H. Collis, 1987 and 1990

Ernest J. Dronenburg Jr., 1981, 1985, 1988, 1991 and 1997

William Bennett, 1973, 1976-1977, 1979 and 1982-1983

Richard Nevins, 1968, 1971, 1980, 1984 and 1986

John W. Lynch, 1960-1961, 1963, 1965, 1969, 1972 and 1975

Robert E. McDavid, 1957

Paul R. Leake, 1956, 1959, 1964 and 1967

Jerrold L. Seawell, 1952

James H. Quinn, 1951 and 1955

George R. Reilly, 1949-1950, 1954, 1958, 1962, 1966, 1970, 1974 and 1978. Reilly served on the board for 11 terms and 43 years—the longest period of any elected official in California.

William G. Bonelli, 1947-1949 and 1952-1953. At the height of his power, they called Bonelli “the Liquor Czar.” They called him a fugitive after the fall. “Big Bill” Bonelli, a professor of political science at Occidental, won a Los Angeles city council seat in 1927.

After helping Governor Frank Merriam defeat socialist Upton Sinclair in a nasty campaign, he held a series of high-powered government jobs, including BOE chairman, while acquiring considerable wealth, allegedly including shares in a multi-million dollar gambling syndicate. Bonelli was indicted in 1939 on charges of saloon business bribery and payoffs. He beat the rap but ended up in front of the federal Kefauver Commission, on television in 1951, answering questions about his ties to organized crime. Although a longtime friend of Los Angeles Times Publisher Harry Chandler, after Harry’s son Norman took over, the paper ran an eight-part series on corruption that featured Bonelli prominently. Shortly afterward, he lost his job on the board, voters stripped the board of its liquor oversight and Bonelli was arrested for violating election laws. He fled to Mexico, was imprisoned for four years, got out, avoided extradition and lived his final 15 years a free man south of the border.  

Richard E. Collins, 1915-1946

John Mitchell, 1913-1915

A. B. Nye, 1911-1913. Nye was the only chair of the current incarnation of the board who simultaneously served as the state's controller.

Alex Brown, 1899-1911

L. C. Morehouse, 1891-1899

G. E. Sloss, 1890-1891

C. E. Wilcoxson, 1883-1990

Warren Dutton, 1880-1882

Chairs and Vice Chairs, State Board of Equalization, 1870-Present (BOE website) (pdf)