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 Ultimately, that proposal was withdrawn amid widespread criticism, and the OTA sought formal guidance from the Attorney General.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.