BILL ANALYSIS AB 384 Page 1 Date of Hearing: January 11, 2010 ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Charles M. Calderon, Chair AB 384 (Ma) - As Amended: January 4, 2010 Majority vote. Fiscal committee. SUBJECT : Property taxation: certificated aircraft assessment. SUMMARY : Extends the Centralized Fleet Calculation Program for statewide assessment of certificated aircraft for property tax purposes until the 2015-16 fiscal year (FY). Specifically, this bill : 1)Extends, until the 2015-16 FY, the application of the current assessment methodology for determining the fair market value of certificated aircraft owned by commercial air carriers for property tax purposes. 2)Extends, until December 31, 2015, the application of the following provisions of law that otherwise are scheduled to sunset on December 31, 2010: a) Revenue and Taxation Code (RT&C) Section 441 that requires a commercial air carrier to file one annual property statement with a designated "lead" county; and, b) RT&C Section 1153.5 that establishes the procedure for selecting a lead county to calculate an airline's fleet value and a coordinated multi-county audit team to perform mandatory audits of commercial air carriers. 3)Specifies that it is "rebuttably" presumed that the pre-allocated fair market value of certified aircraft is the amount determined under the provided formula and, thus, allows either the assessor or the taxpayer to challenge that amount before an assessment appeals board. 4)Imposes a state-mandated local program and provides that, if the Commission on State Mandates determines that this bill contains costs mandated by the state, reimbursement for those costs will be made as required by the statute. AB 384 Page 2 EXISTING LAW: 1)Provides that all property is taxable unless explicitly exempted by the California Constitution or federal law. Limits ad valorem taxes on real property to 1% of the full cash value of that property as set forth in the California Constitution. 2)Requires that real and personal property be taxed at the same rate (Section 2 of Article XIII of the California Constitution). However, personal property, which generally is defined as property other than real property, is subject to property tax of 1% of the assessed value of the taxable personal property. Thus, the property tax applicable to personal property is calculated based on the market value of that property, rather than its "full cash value." 3)Requires each county to impose an ad valorem property tax rate of 1% of the assessed value of the taxable property located in that county, including any taxable certificated aircraft within the county. Typically, certificated aircraft are commercial aircraft operated by air carriers for passenger and freight service, while general aircraft are typically privately owned aircraft. General aircraft are assessed on an aircraft-by-aircraft basis and an assessment is made only in a single county where the aircraft is habitually situated. Certificated aircraft are valued for purposes of property taxation under a "fleet" concept, which means that the basis of the assessed value is not the value of any single aircraft owned by an air carrier, but the value of all aircraft of each particular fleet type that is flown into California. Types are grouped by make and model. Because certificated aircraft are movable, they are often located in more than one county during an assessment year, and assessments are made for each county in which the aircraft in the fleet land to reflect actual presence in California. 4)Prescribes a centralized assessment methodology for valuing certificated aircraft for FYs 2005-06 through 2010-11. Also, until January 1, 2011, allows a commercial air carrier to file a single, consolidated property statement with a designated "lead" county for all certificated aircraft that has acquired a tax situs in California. The centralized assessment methodology is based on a formula to be used by the "lead" county in determining the preallocated fair market value of AB 384 Page 3 each make, model, and series of mainline jets, production freighters, converted freighters, and regional aircraft with a tax situs within California for property tax purposes. The preallocated value is the lesser of: a) The historical cost basis, as specified; or, b) The value referenced in the "Airline Price Guide," a commercially-prepared value guide for aircraft, as adjusted. Once the "lead" county calculates the preallocated value of the aircraft, the information is transmitted to all other counties within which the airline has acquired a tax nexus. Each individual county then determines its allocated portion of the fleet based on the flight data for that particular county. R&TC Section 1152 provides an allocation formula to determine the frequency and the amount of time that an air carrier's aircraft makes contact and maintains situs within a county. An allocation ratio is the sum of two factors: a) A ground and flight time factor; and, b) An arrivals-and-departures factor. [Property Tax Rule 202 (c)]. The allocation ratio is applied to the full cash value of a fleet of a particular type of aircraft operated by an air carrier. The sum of the assessed allocated values for each make and model used by an air carrier results in the total assessed value of the aircraft for that air carrier for a particular county. The lead county is also required to transmit the property statement related to an airport location to the situs county, and each county is responsible for valuing personal property and fixtures at its particular airport locations. 5)Requires assessors to audit once every four years the personal property holdings of any property owner with an assessed value of more than $400,000. (RT&C Section 469). Until December 31, 2010, allows an audit team comprised of staff from one to three counties to perform a mandatory audit of a commercial air carrier. The work performed by the audit team is deemed to have been made on behalf of each county for which a AB 384 Page 4 mandatory audit would otherwise be required under RT&C Section 469. 6)Defines the term "certificated aircraft" as "aircraft operated by an air carrier or foreign air carrier engaged in air transportation, as defined in subdivisions (3), (5), (10), and (19) of Section 101 of Title of the "Federal Aviation Act of 1958" (P.L. 85-726; 72 Stat. 731), while there is in force a certificate or permit issued by the Civil Aeronautics Board of the United States, or its successor, or a certificate or permit issued by the California Public Utilities Commission, or its successor, authorizing such air carrier to engage in such transportation." (RT&C Section 1150). Also defines "converted freighter", "mainline jet", "production freighter", and "regional aircraft". 7)Provides that the existing valuation methodology for certificated aircraft applies for FYs 2005-06 through 2010-11, and is repealed as of December 31, 2010. FISCAL EFFECT : Unknown, but probably, this bill will have no revenue impact since the existing valuation methodology is a reasonable method for determining fair market value of certificated aircraft and this bill simply extends the application of this methodology. Proposition 98 Fiscal Effect : None. COMMENTS : 1)According to the author, "AB 384 is needed to ensure that administrative efficiencies created by AB 964 continue for both the airlines and assessors. AB 964 created a fair and equitable statewide valuation of certificated aircrafts. The Centralized Fleet Calculation Program has allowed assessors to carry out their mandated responsibility to fairly assess taxable property in an efficient manner." 2)The sponsor of this bill, California Assessors' Association, argues that the existing Centralized Fleet Calculation Program, which was established by AB 964 (Horton) in 2005, has been a success. The program "has allowed assessors to carry out their mandated responsibility to fairly assess all taxable property within their jurisdiction in an efficient manner" while streamlining the property tax process for commercial AB 384 Page 5 airlines. The sponsor also states that the "total annual cost savings statewide for assessors with centralized valuation and audit and the avoidance of assessment appeals is estimated at over $3.4 million." 3)The proponents state that the existing Centralized Fleet Calculation Program provides an equitable and consistent formula in valuing aircraft and allows airlines to plan accordingly for the next five years. The proponents also emphasize the importance of the current practice of designating one lead county and allowing airlines to file only one property tax return with that county. 4)Committee staff notes all of the following: a) Background. Prior to 1999, no specific assessment methodology procedure for valuing certificated aircraft or for valuing the carrier's possessory interest in the publicly owned airport existed in California. In 1998, a group of counties and airline industry representatives entered into a written settlement agreement to dispose of outstanding litigation and appeals over the valuation of possessory interest assessments in airports and the valuation of certificated aircraft. The settlement agreement created a new assessment methodology for valuing aircraft that applied to 1998-99 FY to 2002-03 FY and was codified in a three-piece legislative package [AB 1807 (Takasugi), Chapter 86, Statutes of 1998, AB 2318 (Knox), Chapter 85, Statutes of 1998, and SB 30 (Kopp), Chapter 87, Statutes of 1998]. b) The 2005 Settlement Agreement. In 2005, the representatives of the airline industry and a county assessors working group, jointly, refined that valuation methodology, recognizing the need to distinguish between different types of aircraft and to detail the specific calculation of the variable components that were previously lacking. For instance, with respect to calculating the historical cost basis of the aircraft, each variable component is specified: i) Acquisition cost; ii) Price index; AB 384 Page 6 iii) Percent good factor; and, iv) Economic obsolescence is all taken into account. With respect to APG, a "blue book" value guide for aircraft, the use of values referenced in that guide is delineated, recognizing that airlines, generally, receive a fleet discount that is not reflected in prices listed in the guide. The 2005 revisions to the valuation methodology of certificated aircraft were codified by AB 964 (Horton), Chapter 699, Statutes of 2005, (hereafter 'AB 964'). However, AB 964 specified that the revised formula for determining the fair market value of certificated aircraft of a commercial air carrier only applies for FYs 2005-06 to 2010-11. AB 964 also included repeal dates for the provisions prescribing the procedures for designating a lead county assessor's office for each commercial air carrier operating certificated aircraft in California, allowing a commercial air carrier to file one property statement with the lead county, and permitting an audit of those carriers on a centralized basis. Under existing law, those provisions are set to expire on January 1, 2011. c) Certainty and Predictability of the Existing Assessment Methodology . Prior to 1998, the valuation of aircraft had been contentious and challenging for both county assessors and commercial air carriers but the codified valuation methodology has reduced those conflicts. The existing centralized assessment of certificated aircraft provides certainty and predictability for both assessors and airlines. Further, the current procedure of designating a lead county assessor's office to calculate the preallocated fleet value ensures that airlines report the same information to every county, resulting in a uniform statewide assessment. Absent a codified methodology, there is no guarantee that the values determined by each individual county assessor would be the same, since property appraisal is subjective and opinions of value differ. Finally, the centralized assessment of aircraft greatly reduces administrative costs for both parties. As reported by the author, if the existing centralized valuation methodology and the centralized audit program are not extended, 236 additional fleet calculations and 390 additional statewide mandatory audits would be required, resulting in an annual cost of approximately $1.3 million, AB 384 Page 7 and $1.8 million, respectively. Unless the existing methodology for valuing aircraft is extended, both the assessors and airlines will have to deal with multiple tax returns reporting the same information, multiple audits and multiple county assessment appeals. d) The presumption of value . The assessment of certificated aircraft is a difficult and complex task. As such, the potential for litigation and assessment appeals is significant. According to the author, often the best solution is for the Legislature to establish a recommended valuation methodology to arrive at a fair market value for a particular type of property, in this case, certificated aircraft. It is presumed by both the assessor and taxpayer that the methodology will result in a fair and reasonable assessment. However, since appraisal is not an exact science, there may be instances where one of the parties believes, and has clear evidence, that the assessment resulting from the prescribed methodology is wrong. In these instances, the issue is usually settled by an assessment appeals board. This bill allows taxpayers and assessors to appeal a value established by following a legally prescribed methodology. The practical result of "rebuttably presumed" language is that it clearly recognizes that an assessment appeals board has the discretion to set a fair market value where the facts presented clearly overcome the presumption of correctness in any given methodology. e) Related Legislation . AB 311 (Ma), introduced in the 2009 legislative session, was almost identical to this bill. AB 311 would have extended the Centralized Fleet Calculation Program for statewide assessment of certificated aircraft for property tax purposes until the 2014-15 FY. It did not contain the "rebuttable presumption" language. The Governor vetoed AB 311, stating that: "This bill is intended to represent the continuation of an important tax assessment methodology that was agreed to by all the major airlines in 2005. The original methodology brought consistency and greater efficiency to the assessment of certificated AB 384 Page 8 aircraft. However, this bill makes changes that do not reflect consensus. Since the existing methodology does not end until December 31, 2010, I would encourage the author and stakeholders to reach that consensus and send me legislation to that effect." REGISTERED SUPPORT / OPPOSITION : Support American Airlines United Airlines California Assessors' Association (sponsor) Opposition None on file Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916) 319-2098