Tax Panel Vote Is Costly

The state tax board gave $6.3 million in tax refunds to two computer companies last week, disregarding the advice of its own staff and opening the door to a new tax break that experts warn could even cost the state hundreds of millions of dollars.

The vote, which involved only three of the board’s five members -- two recused themselves -- angered the panel’s chairwoman, Carole Migden, who called it “shocking.”

The leader of the state Senate, Democrat John Burton of San Francisco, denounced the refunds as a “giveaway” and said he might submit legislation to prevent the five-member board from making decisions without full participation.

“You shouldn’t be able to give away millions of taxpayers’ dollars without at least a majority vote of the commission -- not a majority of those present -- voting,” he said.

The three members voted 2 to 1 to allow LSI Logic Corp. and Cypress Semiconductor Corp. of the Silicon Valley to receive refunds under the manufacturers’ investment credit, a sales or income tax break that the Legislature approved in 1993 to encourage businesses to buy, build or reconstruct the machinery used to make products.

The staff of the State Board of Equalization had argued that the companies were not entitled to refunds because they had already used other corporate income tax credits -- such as one to encourage research and development -- to reduce their tax liability to zero.

Unused manufacturers’ investment credits can be carried over from one year to the next, but cannot be converted into a refund, according to the staff. Repeated attempts in the Legislature to make the credit refundable have been defeated.

In a May 28 response to LSI Logic’s request, the tax board’s staff quoted current state tax regulations: Any manufacturers’ investment-credit amounts “that would have been required to be carried forward to future years may not instead be claimed as a refund ... in lieu of claiming the” credit.

Moments before the vote Wednesday, board member John Chiang, a Democrat, announced that he could not vote because he owns stock in LSI Logic.

State Controller Steve Westly, also a Democrat and a member of the board, said he would not vote either, because he had accepted campaign contributions from companies interested in similar refunds, although not from LSI Logic or Cypress Semiconductor.

In the past year, Westly has accepted $10,000 from Hewlett-Packard, which has a similar tax refund request pending before the board, according to Deputy Controller Marcy Jo Mandel.

State law forbids members of the Board of Equalization from voting on matters involving companies from which they have received more than $250 in the previous year.

Bill Leonard, who voted with fellow Republican Claude Parrish to give the refunds, said he did not interpret the rules as narrowly as the board’s staff.

“Everyone admitted that the law is written very vaguely about how to apply the different credits,” Leonard said.

Under the tax board staff’s interpretation, he said, the companies could have used one credit but not both, and the manufacturers’ investment credit would have expired.

Given that both tax credits were designed to encourage companies to invest in California, Leonard said, granting the refunds seemed proper.

He predicted that not many other firms would seek similar refunds.

“There are very few companies that have such major research and development investments that they reduce their taxes to zero,” he said. “The computer guys are probably the best example.”

But state tax officials say a “significant” number of companies have expressed interest in such refunds. Preliminary research by the state Senate Revenue and Taxation Committee estimates the ultimate cost to Sacramento at hundreds of millions of dollars.

On the basis of that research, Burton wrote a letter Monday to the Board of Equalization, urging members to reject the appeals of LSI Logic and Cypress.

“As the backlog of research and development credits is estimated to be in the $5-billion range,” he wrote, “a misreading of this statute in favor of LSI Logic would result in revenue losses in the hundreds of millions of dollars, as other taxpayers would attempt to use the same inappropriate interpretation to yield a sales tax refund on top of fully utilized research credits.”

Chairwoman Migden, a Democrat and former assemblywoman from San Francisco, said the cases made by LSI and Cypress “didn’t appear supportable to me.”

LSI Logic sought a refund of $3.9 million for the tax year 1996, while Cypress Semiconductor sought $926,000 for 2000. With interest, the companies are due a total of $6.3 million from the state.

Those refunds were not the only board decisions Wednesday that cost the state general fund. The board also approved changes to the manual used by state auditors. The changes, sought by the computer industry, expand the state’s sales tax exemption for equipment used for demonstration and display purposes.

It is estimated that the changes will cost the state $31 million a year.

The board also retroactively changed the way it taxed three subsidiaries of Unilever, a British-Dutch maker of soap and food. The conglomerate will now get $34 million back from California.

“With no disrespect to my members,” said Migden, who cast the only no vote on the Unilever case, “it was stunning to me, the tally of givebacks ... that day.”