Bill to toughen state False Claims Act could face battle with businesses

SACRAMENTO -- Attorney General Xavier Becerra and Assemblyman Mark Stone introduce legislation to strengthen the California False Claims Act to address tax fraud. But the measure could face a difficult battle with business groups.

AB 2570 would specify the act applies "to claims, records, or statements made under the Revenue and Taxation Code." This simple change would open up the act for use in pursuing unpaid taxes -- including the government's ability to pursue treble damages for violations.

The goal is to help bring in the estimated $20 billion in taxes that go uncollected annually in the state, according figures from the Franchise Tax Board.

"It's time for California to help lead the way and show what accountability looks like, to demonstrate to taxpayers and citizens in California that we have a tax system that works for everybody," said Terry Brennand, the director of revenue, budget and pensions with the Service Employees International Union, appearing at press conference at the attorney general's office. The union is a bill supporter.

The False Claims Act has the potential to be a major investigatory tool and money maker. The U.S. Department of Justice announced in January it recouped $3 billion during the 2019 fiscal year using the federal version of the law.

Speaking after the press conference, Stone, a Democrat from Scotts Valley, said part of the motivation of the bill is to provide a way for whistleblowers to come forward and be rewarded. He said people often ask why the Franchise Tax Board doesn't just use its existing power to go after tax cheats.

"They don't have the visibility," said Stone, who chairs the Assembly Judiciary Committee. "It's a tool to provide incentives for someone on the inside to say, 'Hey, this just doesn't look right.' Now they can take it to the attorney general or a local prosecuting authority.'"

Stone added the bill is "basically the same at this point" as one he introduced last year. AB 1270 ran into heavy lobbying opposition from the financial industry led by the California Retailers Association, California Chamber of Commerce and others. These groups claimed the bill would create legal ambiguities and open them up to potentially costly litigation.

"In changing the definition of 'materiality,' the proposed legislation introduces subjectivity in deciding whether a false record or statement is considered 'material,'" stated an opposition letter from the Retailers Association cited in a Senate Judiciary Analysis of AB 1270. "Rather than defining materiality as the actual effects of a statement, this bill defines materiality as potential effects of a statement. The consequence of such subjectivity is potential additional litigation."

A Chamber-led coalition sent a letter to legislators last year charging AB 1270 "would introduce plaintiffs' attorneys into tax enforcement" and create "potential double jeopardy, even after a clean audit."

AB 1270 ultimately died in the Senate Appropriations Committee after it was tagged with significant potential costs. These included an estimated $1.5 million and seven staff for the state Department of Justice and unknown millions more for courts.

Stone said the earlier bill was widely misunderstood, and his office was working to engage financial companies in talks to reassure them the bill wasn't about allowing "fishing expeditions" by plaintiffs' attorneys.

The Franchise Tax Board maintains ongoing delinquent taxpayers lists, one for companies and another for individuals. The largest amount on the list is the approximately $286 million the agency says is owed by developer James P. Baldwin.