This week, NTU filed a new case in California to protect California taxpayers from a retroactive apportionment scheme which would significantly increase their taxes. The case is National Taxpayers Union v. California Franchise Tax Board, et al. and is in the Superior Court of California in the County of Sacramento.
California Revenue and Taxation Code section 25128.9 (Section 25128.9) was signed into law by California Governor Gavin Newsom on June 27, 2024. Essentially, Section 25128.9 seems to exclude from the apportionment formula any receipts that are not included in net income (such as exclusions, deductions, exemptions, and etc.). This overly broad statement is confusing to taxpayers because the statement “not included in net income” makes it nearly impossible for taxpayers to comply, as they are unsure what income is supposed to be declared and what income is supposed to be excluded. Additionally, Section 25128.9 appears to reach back into eternity, as there is no set time limit as to how far back this section reaches. This can cause millions of dollars to be on the line from taxpayers who, rightfully, failed to comply with Section 25128.9 prior to its enactment.
NTU, by and through its counsel Greenberg Traurig, filed suit to challenge Section 25128.9, seeking declaratory and injunctive relief. In the Complaint, NTU raised three causes of action: 1) Section 25128.9 is vague and violates the Due Process Clause of the U.S. Constitution; 2) the retroactive application of Section 25128.9 violates the Due Process Clause of the U.S. Constitution, and 3) the retroactive application of Section 25128.9 violates the Due Process Clause of the California Constitution.
Regarding the first two causes of action, the Due Process Clause prohibits States from depriving anyone of life, liberty, or property, without due process of the law. Under the first cause of action, for a California statute to be constitutional, it can not be vague, but must let taxpayers know what they are expected to do. Section 21528.9 does not do this. Rather, the phrase “not included in net income” provides no guidance to taxpayers as to what income must be included or excluded. A taxpayer’s honest failure to comply with this vague guidance can subject them to fees and penalties. This type of unfair treatment is prohibited by the Due Process Clause. Under the second cause of action, Section 21528.9 makes the new apportionment formula applicable to “taxable years beginning before, on, or after the effective date of the act adding this section.” By stating it is applicable to years before the effective date, but not establishing a specific date, Section 21528.9 reaches back in perpetuity. 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.
Our third cause of action raises a claim under California’s Due Process Clause which, like that of the U.S. Constitution, prohibits California from depriving any person of property without due process of law. NTU argued Section 21528.9 is illegitimate and arbitrary because, first, Section 25128.9 reverses the status quo of the past upon which its members relied when filing their tax returns, and second, Section 21528.9 contains an unlimited retroactive clause.
This case raises important taxation and policy concerns for California taxpayers. NTU is happy to fight to defend California taxpayers from tax policies such as Section 21528.9 and will keep you all updated as this case progresses.