BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
AB 384 - Ma
Amended: May 5, 2010
Hearing: June 9, 2010 Fiscal: Yes
SUMMARY: Extends Assessment Practices for Commercial
Aircraft from December 31, 2010 to December 31,
2014
EXISTING LAW (California Constitution) provides that
all property is taxable unless explicitly exempted by the
Constitution or federal law, and imposes property tax on
all taxable real and personal property. The Constitution
provides that taxation of "real" property (structures
affixed to the ground, etc.) is limited to the 1975
valuation adjusted for new construction plus an annual
inflation factor of no more than 2%. When a change in
ownership takes place, real property is valued at full
market value as of the year the transaction takes place.
I. Fleet Value
Generally, assessors value business personal property,
which is not subject to Proposition 13's limits on
reassessment, by multiplying the acquisition cost of the
property by a price index, an inflation trending factor
based on the year of acquisition, to estimate its
"reproduction cost new," an approximation of the cost to
replace the property at current market prices. The
"reproduction cost new" is then multiplied by a "percent
good factor" (a depreciation factor) to provide an estimate
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of the depreciated reproduction cost of the property. The
"reproduction cost new less depreciation" value becomes the
taxable value of the property for the fiscal year. Unlike
real property, assessors revalue personal property every
year.
When assessors value "certificated" aircraft, defined
as aircraft operated by air carriers for passenger or
freight service, they estimate the value of the taxpayer's
fleet, which is all aircraft owned by the taxpayer by make
and model. Assessors may only value certificated aircraft
with "situs" in California. If a taxpayer owns an aircraft
that enters into revenue service in the state, then
assessors must value the entire fleet, and then allocate a
share of the fleet value to California to reflect that
fleet's activity in California. The value is then
multiplied by the property tax rate of one per cent to
determine the amount of tax due.
Until 1998, state law did not proscribe a method for
assessors to determine value of any particular aircraft,
resulting in years of disagreements and litigation between
assessors and airlines. In 1998, the Legislature detailed
a valuation methodology for certificated aircraft which was
presumed to equal the fair market value of the aircraft for
those years, enacting three bills to codify a settlement
agreement between several counties and airline industry
representatives (AB 1807, Takasugi; AB 2318, Knox; and SB
30, Kopp). In 2003, the agreement expired, and assessors
again valued aircraft without specific guidance from the
Revenue and Taxation Code.
In 2006, assessors and the airlines again agreed on a
new valuation methodology (AB 964, Horton), set to expire
in the 2010-11 fiscal year, which:
1. Valued aircraft based on the lesser of:
A historical cost basis, or
10 per cent off (for a fleet adjustment) on the
prices listed in the "Airliner Pricing Guide," which
according to its website
( http://www.airlinerpriceguide.com/aboutus.asp ),
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"was established in 1985 to provide the industry
with the most accurate and up-to-date aircraft and
engine values available. With values taken from
actual transactions, the APG provides our
subscribers with a powerful tool to support business
decisions in a rapidly changing aviation
environment." If the APG ceases to exist, the Board
of Equalization (BOE) shall determine the guide or
adjustment.
1. Distinguished between passenger aircraft (main-line
jets or regional jets), and freighter aircraft
(production or converted) by applying different
valuation methods for each.
2. Provided formulas for assessors to reduce original
costs to account for economic obsolescence, which is
based on net revenue per seat mile, net load factor,
and yield. These formulas apply when economic
obsolescence exceeds 10%.
THIS BILL extends the valuation methodology enacted by
AB 964 from the 2010-11 fiscal year to the 2015-16 fiscal
year.
THIS BILL also changes the valuation section of law to
state that the value of the certificated aircraft is
rebuttably presumed to be the value described under the
methodology above, instead of stating that the value is
what the methodology produces. The taxpayer may rebut the
presumption with evidence including, but not limited to,
appraisals, invoices, and expert testimony. The bill also
additionally caps the value of any aircraft to its original
cost from the manufacturer. These changes take effect for
lien dates on or after January 1, 2011.
II. Lead County Status and Audits
AB 964 required the Aircraft Advisory Subcommittee of
the California Assessors' Association to designate a lead
county for each commercial air carrier operating in
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multiple airports in the state. If designated by the
Aircraft Advisory Subcommittee of the California Assessors'
Association, the taxpayer files a property statement with
the lead county assessor, who then calculates the
unallocated fleet value, electronically distributes the
determined fleet value to each county with situs for that
fleet based on an allocation formula, and leads the audit
team.
Additionally, AB 964 required assessors to audit a
commercial air carrier once every four years.
THIS BILL extends the lead county status and audit
provisions enacted by AB 964 until December 31, 2015.
III. Property Statements,
Taxpayers with any taxable personal property exceeding
$100,000 in value must file a property statement with
assessors, and assessors must send property statements to
taxpayers required by law to submit the statement. Any
person owning property with an aggregate cost of below
$100,000 must submit a signed property statement upon
request of the assessor
Instead of filing property statements with each
individual assessor, AB 964 allowed the carrier to file
with the lead county assessor one property statement with
specified contents, one schedule for all aircraft with
situs, and flight data segregated by airport location with
the lead county assessor.
THIS BILL extends the property statement provisions
enacted by AB 964 until December 31, 2015.
FISCAL EFFECT:
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BOE states that because AB 384 extends the existing
methodology for assessing certificated aircraft, the
measure has no revenue effect.
COMMENTS:
A. Purpose of the Bill
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."
B. Come Fly With Me
Assigning value to aircraft is inherently difficult.
While the California Constitution provides that all
property not specifically exempted by state or federal law
is taxable, the Commerce Clause and the Due Process Clause
of the United States Constitution grant protections to
interstate commerce from state and local taxation, so
assessors must tax aircraft, but only using a methodology
that specifically measures that aircraft's activity
California. Additionally, the value of aircraft can
fluctuate: economic recessions reduce airline revenue as
fewer people can afford passenger flights and producers
ship fewer goods, leading to reduced revenues, and
therefore lower values for aircraft. Also, airlines
compete both domestically and internationally, and have
filed for bankruptcy in recent years, so an individual
carrier's market share can change quickly; UPS and Fed Ex
recently grabbed a larger share of the cargo flight market
when DHL exited.
Prior to 1998, state law did not provide much guidance
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for assessors to value commercial aircraft; instead, they
were left to their own devices, although the allocation
formula that apportions value to the state based on the
aircraft's time in the state and its arrivals and
departures has lived in statute since the 1960s. Without
clear direction from the state, assessors and commercial
airlines frequently disagreed about valuations, resulting
in litigation, and eventually the settlement agreement
enshrined by the Legislature in 1998. After that agreement
expired, assessors and airlines again met and haggled, this
time resulting in AB 964, which provided further detail for
assessors and taxpayers to rely upon. AB 964's provisions
sunset after next year, and assessors and airlines have
brought forth AB 384 to extend these provisions, thereby
preserving d?tente in this particularly tricky corner of
the property tax world, and preventing the uncertainty that
plagued certificated aircraft assessment in the past.
C. Domestic or International?
In addition to equalizing the assessment practices in
California's 58 counties, the State Board of Equalization
values the property of "statewide assessees," industries
with property in more than one county, such as utilities
and railroads. Similar to personal property such as
certficated aircraft, and unlike locally-assessed real
property, BOE revalues statewide assessee property every
year. BOE allocates the property tax revenue to each
county where the taxpayer has situs.
The Legislature has previously considered assigning
certificated aircraft assessment from county assessors to
the BOE, essentially treating certificated aircraft, which
operates in several counties, like utility and railroad
property. Many other states centrally assess certificated
aircraft. In 2003, the Committee approved AB 593
(Ackerman), although the measure was subsequently held in
the Senate Appropriations Committee. Proponents argued
that statewide assessment would reduce administrative
burdens for the airlines, which at the time had to file
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property statements and appeal valuations individually with
each county assessor for each county in which it operates.
Assessors countered that BOE lacked the expertise to value
certificated aircraft, and would still be responsible for
valuing real property and fixtures, thereby minimizing any
administrative efficiencies in tax administration.
Airlines sought centralized assessment with the BOE during
negotiations over AB 964, only to agree to the lead county
model in negotiations. Currently, 10 counties serves as
lead counties, with Los Angeles leading the assessment for
7 out of 11 fractional aircraft companies, and 17 out of 49
airlines.
The Committee's analysis of AB 593 also raised another
concern: that BOE often sides with taxpayers instead of
with assessors, and given the revenue impacts of
certificated aircraft assessment, the BOE should not be
granted the power to assess aircraft on behalf of the
counties. The analysis stated:
"The Board of Equalization in recent years has shown
itself to be remarkably friendly to business
taxpayers. Time after time, business tax appeals,
unitary property assessments and regulatory projects
have been decided by the Board in favor of business
taxpayers, despite contrary advice from legal and
administrative staff. Indeed, taxpayers can preempt an
unfavorable Board vote by forcing selected Board
members to recuse themselves from a decision, by
making strategic contributions to those members. There
is good reason to believe that if the responsibility
for assessing aircraft is assigned to the Board of
Equalization, aircraft will be assessed and taxed
significantly less than currently."
D. Arrivals and Departures
In addition to centralized assessment, another point
of contention between assessors and airlines is whether to
value embedded software. Assessors may value storage media
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and basic operational programs, defined as those
fundamental and necessary to a computer functioning;
however, "computer programs" are expressly exempt (the
statute, crafted in 1972, refers to punched cards, tapes,
discs, or drums). In 1996, BOE implemented Property Tax
Rule 152, which interprets statute to include only the
ROM-based kernel software contained in a computer, and
allowed operating system software to be exempt from the
property tax. As a significant and growing portion of the
value of modern aircraft comprises computer systems and
software (fly-by-wire systems, navigation, etc.), assessors
were concerned during AB 964 negotiations that the BOE
theory used to reduce tax on computer systems will be
applied in the assessment of aircraft. However, the grand
bargain of AB 964 was to maintain local assessment of
certificated aircraft, but not to include embedded software
in valuation. AB 384 extends this agreement and opts not
to reopen embedded software or centralized assessment.
E. Catching a Later Flight
Last year, the Legislature approved AB 311 (Ma), which
extended the valuation methodology for certificated
aircraft until the 2014-15 fiscal year. The Governor
vetoed AB 311, stating:
To the Members of the California State Assembly:
I am returning Assembly Bill 311 without my
signature.
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
aircraft. However, this bill makes changes that do
not reflect consensus. Sincethe existing methodology
does not end until December 31, 2010, I would
encourage the author and stakeholders to reach that
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consensus and send me legislation to that effect.
I look forward to signing a bill that is agreed to by
all the parties involved.
Sincerely,
Arnold Schwarzenegger
AB 384 is substantively similar to AB 311, with the
main differences that AB 384 extends the assessment
methodology one year longer (2015-16), than AB 311
(2014-15), replaces language specifying value with a
rebuttable presumption, providing a cap on valuation equal
to its original cost, and specifying that the taxpayer may
rebut the presumption with appraisals, invoices, and expert
testimony.
F. Not So Mandatory
One part of AB 964 requires an audit team of
auditor-appraisers from at least one but not more than
three counties to audit a commercial air carrier once every
four years. However, mandatory audit requirements are a
relic from a bygone era that do not have a place in today's
tax collection world. The Legislature enacted the current
mandatory audit requirement in a package of reforms in
response to the assessor scandals of the late 1950s and
1960s, where assessors were convicted of reducing
assessments in exchange for bribes (AB 180, Petris and
Knox, 1966). Today, county boards of supervisors and the
BOE more effectively monitor assessors that during the time
of the scandals. Voters also elect assessors, who are in
the best position to know which taxpayers may not be
adequately reporting personal property and business
fixtures, and whether an audit may uncover a taxpayer's
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lack of compliance with the law. Mandatory audits
substitute the Legislature's judgment of whom an assessor
should audit, instead of the locally-elected property tax
expert who can best deploy audit resources in a
cost-effective manner. Additionally, state law no longer
specifies which taxpayers FTB should audit, removing such
direction for water's edge taxpayers in a measure the
Committee approved last year (SB 788, Cogdill, 2007). The
Committee may wish to consider deleting the mandate
directing assessors regarding who and when to audit in a
time of extreme fiscal stress, when local agencies struggle
to make ends meet given moribund revenues, higher costs and
caseloads, and costly state mandates.
Support and Opposition
Support:California Assessors Association, United
Airlines, Alaska Airlines
Oppose:None received.
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Consultant: Colin Grinnell
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