BILL ANALYSIS AB 384 Page 1 CONCURRENCE IN SENATE AMENDMENTS AB 384 (Ma) As Amended May 5, 2010 Majority vote ----------------------------------------------------------------- |ASSEMBLY: |62-8 |(January 27, |SENATE: |33-0 |(August 12, | | | |2010) | | |2010) | ----------------------------------------------------------------- Original Committee Reference: REV. & TAX. SUMMARY : Extends the Centralized Fleet Calculation Program for statewide assessment of certificated aircraft for property tax purposes until fiscal year (FY) 2015-16. The Senate amendments provide that, with respect to lien dates occurring on and after January 1, 2011, the value of an individual aircraft assessed to the original owner may not exceed its original cost and that the pre-allocated fair market value of an aircraft may be rebutted by certain evidence, including appraisals, invoices, and expert testimony. AS PASSED BY THE ASSEMBLY , this bill: 1)Extended, until FY 2015-16, 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)Extended, 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)Specified that it is "rebuttably" presumed that the pre-allocated fair market value of certified aircraft is the AB 384 Page 2 amount determined under the provided formula and, thus, either the assessor or the taxpayer may challenge that amount before an assessment appeals board. 4)Imposed a state-mandated local program and provided that, if the Commission on State Mandates determined that this bill contained costs mandated by the state, reimbursement for those costs will be made as required by the statute. FISCAL EFFECT : According to the State Board of Equalization, 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. COMMENTS : 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." 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 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." 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. Committee staff notes all of the following. AB 384 Page 3 1)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 FY 1998-99 to FY 2002-03 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]. 2)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: a) acquisition cost; b) price index; c) percent good factor; and, d) 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, (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. AB 384 Page 4 3)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, 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. 4)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 AB 384 Page 5 to set a fair market value where the facts presented clearly overcome the presumption of correctness in any given methodology. Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916) 319-2098 FN: 0005161