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■ Dicon Fiberoptics v_Franchise_Tax_Bd_B202997

Dicon Fiberoptics, Inc., appeals from the trial court’s judgment sustaining without leave to amend the demurrer of the Franchise Tax Board to Dicon’s complaint seeking refund of a tax credit for employing disadvantaged workers.  To receive the credit, Dicon submitted vouchers to the board certifying Dicon had employed disadvantaged workers.  After auditing the vouchers, the board partially denied the tax credit to Dicon.  Dicon contends the board has no legal authority to audit its vouchers, a contention we reject.  We nevertheless conclude Dicon states a cause of action that the board exercised its audit power improperly, and therefore the trial court erred in sustaining the board’s demurrer.  Accordingly, we reverse and remand.

FACTS AND PROCEEDINGS

            Certain areas and localities in California suffer from persistently high unemployment, poverty, and anemic economic growth and activity.  Hoping to remedy these problems, the Legislature enacted Government Code section 7070 et seq., which is known as the Enterprise Zone Act (Act).  The Act’s purpose is to reduce obstacles the Legislature believes impede private investment and business in economically depressed areas in California.  (See Gov. Code, § 7071, subd. (a).)  The Act permits city and county governments containing depressed regions within their jurisdictions to apply to the Department of Housing and Community Development (DHCD) for designation of those regions as “Enterprise Zones.”  (Gov. Code, §§ 7072, subd. (a), 7073, subds. (a), (b).)  Businesses operating within an Enterprise Zone that hire certain categories of disadvantaged workers – known as “qualified employees” – earn tax credits for the wages they pay those workers.  (Rev. & Tax. Code, § 23622.7.)  Depending on the length of time of employment, the tax credit is between 10 and 50 percent of a worker’s wage.  (Id., subd. (a).)

            In 1994, the Legislature expanded the categories of qualified employees covered by the Act from participants in certain economic assistance and job programs to those eligible to participate in those programs.[1]  (Assem. Com. on Revenue and Taxation, Analysis of Sen. Bill No. 1770 (1993-1994 Reg. Sess.) as amended June 2, 1994.)  Lawmakers anticipated that because a worker’s eligibility to participate in a job or assistance program involved standards less black-and-white than confirming actual participation, the Legislature’s expansion of the types of workers whose employers could receive a tax credit increased the risk of tax abuse.  Thus, administrative regulations governing the credit required the local entity operating an Enterprise Zone to establish a vouchering program to certify a worker satisfied the statutory criteria of a “qualified employee.”  (Cal. Code Regs., tit. 25, § 8463, subd. (a)(1).)  Depending under which job or assistance program a worker was deemed a “qualified employee,” a vouchering program required a variety of documents to prove the worker met the statutory criteria.  (Rev. & Tax. Code, § 23622.7; Cal. Code Regs., tit. 25, §§ 8463, 8466.)  Following a vouchering program’s receipt of documents proving a worker was a “qualified employee,” the business employing the worker could receive a voucher from local authorities identified by the program.[2]

            Appellant Dicon Fiberoptics does business in an Enterprise Zone.  Dicon alleges it complied with all requirements for earning the tax credit for employing qualified employees in an Enterprise Zone.  Among those requirements, it obtained vouchers from any one of several state or local entities who certified Dicon’s employees fit within categories of workers covered by the Act.  (Rev. & Tax. Code, § 23622.7, subd. (c).)[3]  In November 2003, Dicon submitted a claim for refund of taxes for the taxable year ending in March 2001.  Submitting vouchers showing it had employed qualified workers in the 2000-2001 tax year, Dicon sought a credit of more than $3.6 million.  Almost three years later in October 2006, respondent Franchise Tax Board (FTB) denied $1.1 million of the requested refund.  Dicon alleges FTB’s denial was improper because FTB wrongfully refused to accept some of Dicon’s vouchers.  FTB demanded instead that Dicon provide the documents underlying the local agencies’ issuance of the vouchers.

Dicon appealed to the State Board of Equalization, which dismissed the appeal in March 2007.  Dicon thereafter filed the lawsuit at issue in this appeal.  Seeking recovery of the $1.1 million credit, Dicon alleges FTB improperly rejected its vouchers.  Dicon alleges it did not have the documents FTB demanded because they related to the personal circumstances of Dicon employees that made them “qualified employees,” such as a criminal record and other impediments to employment, that were private to employees and beyond Dicon’s custody and control.

FTB demurred to the complaint.  It argued that Revenue and Taxation Code section 23622.7 governing the tax credit and vouchers did not vest local employment or social service agencies with exclusive authority to certify a worker as a “qualified employee.”  Thus, the statute did not obligate FTB to accept vouchers from local agencies, and did not prohibit FTB from asking Dicon for the documents on which the local agencies based their decisions.  Because Dicon had not supplied the documents FTB demanded, FTB asserted Dicon failed to state a cause of action.  The trial court agreed and sustained the demurrer without leave to amend.  The court entered judgment for FTB, and this appeal followed.

Held:    

Trial court judgment is reversed where although defendant's authority to examine and audit tax returns does permit it to audit vouchers issued by a local employment or social services agency, the court erred in sustaining defendant's demurrer to plaintiff's complaint seeking refund of a tax credit as the complaint alleges facts sufficient to state a cause of action that the Board exercised its audit power improperly and plaintiff should get the tax refund.
 

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