Two taxpayer advocacy groups have sued California's state government, accusing lawmakers of violating the Constitution by attempting to change state law to force companies to pay billions more dollars in taxes on income earned decades in the past - but only after the state lost appeals before a state panel under the prior law and stood to lose billions of dollars in revenue the state's Democratic governing majority needed to meet their current budget goals.
On Aug. 14, the National Taxpayers Union filed suit against the state in Sacramento County Superior Court. Two days later, the California Taxpayers Association also filed their own suit against the state in Fresno County Superior Court.
Both lawsuits seek court orders declaring unconstitutional a new state law that seeks to effectively reverse the decisions of California's Office of Tax Appeals and force corporations to reopen prior years' tax filings and pay big money the state said they should still owe, no matter how the OTA had ruled.
Democratic lawmakers have asserted the new law, known as Senate Bill 167, merely "clarifies" existing law.
SB167 was passed this summer as part of a series of so-called "trailer bills" accompanying passage of the state budget.
The passage of the law followed on decisions from the California OTA in favor of corporations amid disputes with the California Franchise Tax Board, the state agency that handles income tax collections.
Those disputes, involving separate tax appeals from Microsoft and the Southern Minnesota Beet Sugar Cooperative, centered on whether the state of California can tax income generated by corporations globally, rather than solely in California.
In those cases, the OTA ruled unanimously in favor of the corporations, declaring the state had overtaxed them.
The Tax Board then turned to the Democratic supermajority in Sacramento, which enacted SB167 in an attempt to invalidate the OTA's ruling and force the companies to pay the higher taxes, by "clarifying existing law" to allegedly make clear that the Franchise Tax Board's interpretation was correct.
The lawsuits, however, say SB167 does much more than that, essentially overturning interpretation of California tax law that dates back to the 1960s and potentially forcing companies to reopen their books and face unascertainable amounts of future tax liabilities for income earned decades in the past.
The lawsuits assert SB167 amounts to an unconstitutional retroactive application of the tax code, seeking to force the companies to pay more taxes on income for which they were already taxed under the prior tax laws.
The lawsuits allege SB167 is unconstitutionally vague, because it leaves taxpayers unable to know how to comply with the law. And they said the retroactive application is an unconstitutional violation of taxpayers' rights to due process, by giving the state the power to reach back into "eternity" to tax corporations and others.
"This unlimited retroactive period is wildly outside the scope of Supreme Court precedent on the issue which, to date, has not approved of an income tax statute with more than a two year retroactive period," the National Taxpayers Union said in a statement announcing the lawsuit.
In a statement announcing their lawsuit, the California Taxpayers Association called SB167 an "egregious violation of taxpayers' rights."
“This retroactive tax hike tramples on taxpayers’ right to due process and violates every principle of good tax policy," said CalTax President Robert Gutierrez. "We’re confident the court will agree that it is unconstitutional for the state to enact a law in 2024 that is retroactive to the year the Beatles played their final concert.”