California ‘Practice Privilege’ To Be Delayed Until 2011

By Allison Schiff

In an about-face decision at board meetings held in Sacramento on Feb. 22 and 23, the California Board of Accountancy (CBA) agreed to back state Senate Bill (SB) 503 to provide relief to out-of-state CPAs from the requirements of the state’s Practice Privilege Notification Program (PPNP) that passed into law on Jan. 1.

SB 503 proposes a significant grace period for the PPNP—through Jan. 1, 2011—during which the state will restore its prior system of “temporary and incidental practice.”

CPAs and the state boards that represent them had been up in arms over California’s new stringent practice privilege requirements and the virtual kibosh it put on efforts by the American Institute of CPAs (AICPA) and the National Association of State Boards of Accountancy (NASBA) to enhance interstate reciprocity and increase consumer protection through the Uniform Accountancy Act (UAA).

The bill also provides for a limited provisional practice without registration as long as the practice is incidental to practice in another state, California clients are not solicited and there is no assertion that the individual CPA or firm is licensed or registered to practice in California. Unregistered individual CPAs and firms providing financial services to California clients will still be subject to the CBA’s authority. Until the California legislature passes SB 503, the existing PPNP remains in effect for out-of-state CPAs.

Opposition to PPNP

Various state accountancy boards have taken specific issue with the practice privilege statute’s ambiguous language, punitive fees of up to $5,000 for a first-time violation and drawn-out and expensive application process. In addition, according to CalCPA Government Relations Director Bruce Allen in a Feb. 6 letter to the CBA, some “California CPAs are expressing grave concerns as to possible retaliatory action by state boards of accountancy in response to the burdensome California requirements.”

Though the board’s decision is seen by many as a step forward, the proposal is not yet law, and many CPA advocates are wary of the obligations created by interstate practice privilege requirements.

“While other states are working to eliminate barriers for CPAs in their states by adopting the UAA concept of substantial equivalency, California’s approach is contradicting this concept by putting a new and additional barrier in place,” wrote AICPA Board of Directors Chairman Leslie Murphy and AICPA President Barry C. Melancon in an official letter to CBA President Ronald Blanc on Feb. 15.

Accounting and Auditing Oversight Committee Vice Chair George Victor expressed exasperation at this new strip of red tape obscuring what could be a very simple process.

“It’s just frustrating because it seems like we’re being stifled by bureaucracy,” said Victor. “In trying to protect consumers, legitimate CPAs who want to comply are instead steered away from wanting to do business in California.”

There was special confusion in the CPA community regarding who was actually obligated by these new rules. As the law stands now, if a CPA from a firm not registered in California provided services even tangentially connected to the state of California, at least one partner is required to seek full licensure.

New York, Multistate and Local Taxation Committee Chair Steven Eller sees this as the first step down a slippery slope.
“The fear for northeast firms with clients, but no office, in California, is that they will now have to pay income tax there because they are deemed to be doing business there,” said Eller. “They [were] saying that if you service California clients, regardless of where you do the actual work, California income tax has to be paid for revenue earned through business transactions that involve California.

“This is more than just the issue of being required to get a California license,” he said. “There are ramifications here.”

“For a New York CPA with one or two California clients, the whole application process would be a tremendous burden,” said Tax Division Oversight Committee Chair Maryann Winters. “But it is a legitimate concern that practice privilege must be controlled.

“Every state has an obligation to protect its consumers, because there are some unscrupulous preparers out there,” she said. “It is valid to want to protect your consumers from fly-by-night operations, but it’s not the licensed CPAs who are the problem.”

Eller, who called the practice privilege legislation “overbearing and overreaching,” compared the permit fee charged by the CBA to the fee a business has to pay in New York state in order to form an LLC (limited liability company).

“This has nothing to do with a tax on revenue—it’s a surcharge, a levy, found money,” said Eller. “I think maybe they [are] doing this in part as a protection mechanism, but also because of budget shortfalls, as there are now in many states,” he said. “If you multiply the fee by the number of all the firms around the country who need the permit, there is significant revenue that can be generated there.”

Victor hopes that the stringent new statute doesn’t discourage interstate business relationships.

“Right now, this thing is basically unique to California, but there is the possibility that if it is allowed to continue, other states may make similar moves,” said Victor. “In addition to creating a burdensome bureaucracy, it is basically just a fee-generator and counterproductive to what NASBA and the AICPA tried to do with the Uniform Accountancy Act.”