‘Foul-Up’ Lets Liquor Taxes Go Untapped : Government: Officials mistakenly told distributors not to collect levies on sales to military bases. Now the state has to try to recoup $7 million that wasn’t collected.

At a time when the state feels compelled to raise taxes on motorists and shoppers, it has neglected to collect millions of dollars in taxes from liquor distributors.

In what officials now acknowledge was a “foul-up,” the State Board of Equalization has ignored about $7 million in taxes that it should have started collecting in 1984 when tax exemptions on liquor sold at military bases expired.

Instead, the agency continued to advise liquor distributors in official tax guides and on printed tax forms that sales at military bases were exempt from taxes.

“I am convinced that we are not sloppy but in this case we made a mistake. It was an error on our part,” the board’s executive director, Cindy Rambo, told The Times.

In a move that both the industry and members of the Board of Equalization concede will spark a legal battle, the agency began this week to assess individual distributors for back taxes plus interest on any wine and hard liquor sold in the last three years to military bases.

Jim McDermott, president of the Wine & Spirits Wholesalers of California, said he is certain the industry will appeal the assessments.

“I can’t believe they would come along now and want to collect retroactively the taxes that are involved when they told us we were exempt,” he said. “I feel there must be some misunderstanding. Why would they sit and wait all this time to apply a tax they say they should have applied in 1984?”

Even members of the Board of Equalization conceded the industry will have good cause to appeal.

“I would like to have them come up with a good case,” said board member Ernest J. Dronenburg, referring to the liquor industry. “I’m sympathetic to them on a fairness ground.”

Rambo, who became the board’s executive director in February, 1988, said apparently the agency’s staff failed to notice a provision in California law stating that the military exemption from alcoholic beverage taxes was “to remain in effect only until Jan. 1, 1984.” She said the mistake was first discovered in 1987 but memorandums outlining the problem were never circulated beyond the lower level staff that had uncovered it. She said it was not brought to her attention until six weeks ago.

“It was my point of view that when you have a problem like this the best thing you can do is own up to the fact that you made a mistake and do the best you can to rectify it,” she said.

Last week, she said the five-member board that governs the agency was advised by its lawyers that state law required that it attempt to recover the revenue. She said a statute of limitations prevented the board from seeking back taxes beyond three years.

“It was quite a shock when we heard about it,” said board member Conway Collis. “I think the Board of Equalization staff has improved dramatically in the last six years and they are now as good as any agency in state government, but this is clearly a significant and embarrassing foul-up.”

He said legally the board “cannot give away the state’s money so we had no choice but to try to collect this tax.”

Senate Revenue and Taxation Committee Chairman John Garamendi (D-Walnut Grove) theorized that the distributors probably will be successful in challenging the assessment because the state had advised them in writing that they did not need to pay the tax.

“I am amazed this happened,” he said. “The board usually seems on top of these kind of issues. Maybe they were surprised that we let a tax exemption expire. We so rarely do that, perhaps it never occurred to them that we might.”

Garamendi was a major sponsor this year of a proposal to increase the state’s gasoline tax by 9 cents per gallon to raise revenue for a 10-year, $18.5-billion transportation improvement program. The tax goes to the voters in June. A temporary one-quarter-cent increase in the state sales tax went into effect Dec. 1 to pay for earthquake repairs and relief.

The Board of Equalization, which is composed of elected members, administers most state business taxes including the alcoholic beverage tax totaling about $128 million each fiscal year.

The liquor distributors can appeal the assessment for back taxes to the board. If the board rules against them, they can appeal to the courts.