Commentary: Inventor Hyatt fought state tax collectors and won

Sometimes, if you are stubborn enough, you can fight city hall, or a state bureaucracy, and emerge as a winner.

It took nearly a quarter-century, but Gilbert Hyatt is a winner in his long-running battle with California tax collectors over whether he was a Californian or a Nevadan when he began collecting multi-million-dollar royalties for his high-tech inventions.

It would take a novel, or a multi-part television series, to fully depict the battle that Hyatt has waged with the Franchise Tax Board, mostly in court cases in California, in Nevada and even before the U.S. Supreme Court.

The very brief version is that when Hyatt began collecting royalties in 1991 from his inventions, he said he had already moved to Nevada, which has no state income tax, while California tax officials said he was still domiciled in Southern California and didn’t change residences until sometime in 1992.

After the legal underbrush was finally cleared away, the issue was argued before the California Board of Equalization a couple of weeks ago, with Hyatt, unusually, personally arguing his case during a 13-hour marathon session.

It was, ironically, one of the last income tax appeals that the BOE will handle because the Legislature and Gov. Jerry Brown have stripped the board, composed of five elected officials, of most of its duties and are shifting them into a new state tax agency.

With interest and penalties, the $13.3 million that the state originally sought from Hyatt could have ballooned to as much as $55 million.

Much of the wrangling involved minutiae of Hyatt’s living and working circumstances during a few months in late 1991 and early 1992, two years in which he reported more than $100 million in income but said just $600,000 of it was earned while he resided in California.

In the end, he won a split decision. By a 3-2 vote, the board declared that he owed no tax for 1992 and should pay only $1.9 million for 1991 plus some interest, which means the state probably would collect less than it cost to pursue the case all those years. And it may have to pay Hyatt $50,000 because of a Nevada court judgment that the Franchise Tax Board had unduly harassed him as it sought to collect taxes.

The Hyatt case is certainly interesting unto itself, but it also underscores the huge discrepancy of one state – California – having the nation’s highest state income tax rates while its neighbor to the east levies no state income taxes.

California voters jacked up tax rates on the state’s highest income taxpayers in 2012, supposedly temporarily. Then they voted again last year to extend those higher rates for 12 more years through 2030 via Proposition 55,  backed by a coalition of public employee unions and other groups with stakes in state spending.

There’s no question that Hyatt, anticipating a big payday from his inventions, changed addresses specifically to avoid California income taxes, which were markedly lower then.

While there are anecdotal accounts of wealthy Californians changing their residences to Nevada since the tax rates were hiked in 2012, there’s no evidence – yet – of a mass migration. But Proposition 55, making the higher tax rates at least semi-permanent, might have that effect.

Hyatt could be a pioneer of sorts, and if others follow his lead, the state could see a big decline in revenue, since half of the state’s income taxes are paid by those in the top tax brackets.