Can they do that?

A friend of mine, who is also a Real Estate Broker, was ranting the other day about our state's tax board. It seems that the Franchise Tax Board reported to the fine city in which we reside, that she filed a Schedule C on her tax returns for some number of years. The city is trying to extract business tax revenue when it has already been paid by the Realtor's employing broker. She called the city and told them this and they removed her from the system - until next time they run the gill net through the self-employed who live here. In her case, as in mine, our offices are in different cities, but our brokers still pay the tax to SJ. Guess who got a letter in the mail over the weekend? Yup. I called them this morning and was put on hold so long I got frustrated and hung up.
Susan was angry that the state shared her tax return with the city and I'm not too happy about it, either. Now I'm wondering... can they do that?