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Key takeaways
- The Attorney General has confirmed that taxpayers can challenge the application of a California tax regulation that is in conflict with a statute at the OTA.
- The opinion provides taxpayers with an option to challenge tax regulations that are in conflict with a California statute on a pre-payment basis.
California’s Attorney General has issued an opinion confirming that the Office of Tax Appeals (“OTA”) may determine that a regulation conflicts with a statute and may, on that ground, refuse to apply that regulation to the named taxpayer in the appeal before it.1 This opinion re-opens a powerful administrative avenue for contesting California Department of Tax and Fee Administration (“CDTFA”) and Franchise Tax Boad (“FTB”) regulations without having to file a refund action in court.
How We Got Here: The Janus Appeal
In 2023, Reed Smith represented Janus Capital Group before the OTA in its challenge to California Code of Regulations Section 25137-14, a special industry regulation for the sourcing of receipts generated by mutual-fund service providers.2 Janus argued, in part, that the regulation was invalid due to its conflict with California’s alternative apportionment statute. The OTA declined to consider the issue, held that it lacked the power to assess the regulation’s validity, and enforced the regulation against the taxpayer. After Janus, the OTA proposed a rule that would have barred all regulatory challenges absent prior judicial invalidation. Ultimately, that proposal was withdrawn amid widespread criticism, and the OTA sought formal guidance from the Attorney General. The resulting Opinion 23-701 directly repudiates the jurisdictional rationale that controlled in Janus. The OTA must now consider issues similar to those raised in Janus, or any challenge to a regulation’s validity based on its deviation from or contradiction to statutory text.
Implications for Taxpayers
- Taxpayers contesting CDTFA or FTB assessments may now raise arguments at OTA concerning a regulation’s validity due to conflicts with the statutory authority. Thus, taxpayers need not pay the tax, seek a refund, and bring the matter to Superior Court, to address such disputes.
- While the OTA’s authority to not apply a regulation is limited to statutory conflicts (not constitutional grounds) relevant to the specific taxpayer at issue, the rationale espoused in a favorable OTA opinion may serve as persuasive authority in later appeals and state court cases involving the same regulation, and may prompt regulatory amendment or repeal.
- Taxpayers should scrutinize any regulation affecting their liability for statutory consistency early in the audit or protest cycle and be prepared to present statutory text, legislative history, and arguments regarding the application of Yamaha3 and established deference principles in briefing to the OTA.
- The ruling enhances leverage in settlement discussions, as agencies now face the risk of a published decision in which a regulation is not be applied to a particular taxpayer, potentially creating unfavorable precedent.
- Finally, because OTA opinions are subject to de novo judicial review, if a taxpayer is dissatisfied with the outcome at the OTA, the taxpayer may still seek full judicial consideration, ensuring that important statutory-versus-regulatory questions can ultimately be resolved by the courts.
If you have questions about how this development may affect you or wish to discuss a potential challenge to the application of a California tax regulation, please contact the authors of this article or any member of the State Tax team at Reed Smith.
- California Office of Attorney General Opinion No. 23-701 (July 31, 2025)
- In re: Janus Capital Group, Inc. and Subsidiaries, 2023-OTA-443 (“Janus”).
- Yamaha Corp. of America v. State Bd. of Equalization, 19 Cal. 4th 1 (1998).
Client Alert 2025-214
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