BILL ANALYSIS Ó
AB 561
Page 1
Date of Hearing: May 8, 2013
ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT
K.H. "Katcho" Achadjian, Chair
AB 561 (Ting) - As Amended: April 30, 2013
SUBJECT : Taxation: documentary transfer tax.
SUMMARY : Makes changes to the types of transfers of real
property that are subject to the Documentary Transfer Tax Act.
Specifically, this bill :
1)Defines "realty sold" to include, but not be limited to, any
acquisition or transfer of ownership interests in a legal
entity that would constitute a change in ownership of that
legal entity's real property pursuant to current law.
2)Repeals the exemption for transfers of interest in
partnerships or other entities treated as partnerships for
federal tax purposes, as defined by current law.
3)Repeals an obsolete provision in existing law pursuant to
federal law which has been repealed.
4)Makes technical changes.
EXISTING LAW :
1)Establishes the Documentary Transfer Tax Act.
2)Authorizes cities and counties upon adoption of an ordinance
by the board of supervisors, to impose a tax on a deed,
instrument, or writing in which any land or other realty sold,
based on the value of the real property transfer, if the value
exceeds $100.
3)Authorizes counties to impose the tax at a rate of $0.55 for
each $500 of value.
4)Authorizes a city, upon adoption of the tax by the county, to
impose a documentary transfer tax at half the rate of the
county and apply it as credit against the county rate.
5)Provides several exemptions to the tax including most
government-owned property, properties of nonprofit
AB 561
Page 2
organizations, cemetery lots, recipients of foreclosed
properties, the division of property between spouses under
dissolution of marriage, certain reorganization
of corporations under the Federal Bankruptcy Act, transfers
between entities where 'underlying' ownership remains
unchanged, and transfers of certain partnership properties.
6)Authorizes charter cities to enact a real property transfer
tax.
7)Defines "change in ownership" to mean a transfer of any
interest in real property, between a corporation, partnership,
or other legal entity and a shareholder, partner or any other
person.
8)Specifies what constitutes "a change in ownership." Sets
forth the general rule that, when real property is owned by a
legal entity, the purchase or transfer of ownership interests
in that entity does not trigger a change in ownership of the
property, unless a) there is a "change in control" of the
legal entity, or b) a cumulative transfer of more than 50% by
the "original co-owners." Thus, when any person or entity
obtains control, through direct or indirect ownership or
control, of more than 50% of the voting stock of a
corporation, or a majority ownership interest in any other
type of legal entity, a reassessment of real property owned by
the acquired legal entity (or any of its subsidiaries) is
triggered. Furthermore, when voting stock or other ownership
interests representing cumulatively more than 50% of the total
interest in a legal entity is transferred by any of the
"original co-owners" in one or more transactions, the real
property that was previously excluded from reappraisal will be
reassessed.
FISCAL EFFECT : None
COMMENTS :
1)The Documentary Transfer Tax, established in 1967, is a
general tax that authorizes cities and counties to enact taxes
on documents that serve to transfer real property valued over
$100. Existing law establishes the tax rate for counties at
$0.55 per $500 of the property value. All 58 counties have
enacted a documentary transfer tax, which then enables cities
to levy a tax at half of the county rate. The transfer tax
AB 561
Page 3
enacted by the city is credited against the amount of the
county tax due. In other words, if a city enacts a
documentary transfer tax, then they receive one half of the
revenue from the countywide rate. If the city does not enact
the tax, then the entire revenue goes to the county.
Current law provides several exemptions to the documentary
transfer tax including most government-owned property,
properties of nonprofit organizations, cemetery lots,
recipients of foreclosed properties, the division of property
between spouses under dissolution of marriage, certain
reorganization of corporations under the Federal Bankruptcy
Act, transfers between entities where 'underlying' ownership
remains unchanged, and transfers of certain partnership
properties.
2)This bill makes changes to the types of transfers of real
property that a documentary transfer tax can be imposed upon.
This bill defines "realty sold" to include, but not be limited
to, any acquisition or transfer or ownership interests in a
legal entity that would constitute a change in ownership of
that legal entity's real property pursuant to the definition
of a 'change in ownership' in the Revenue and Taxation Code.
This bill deletes an obsolete code section, originally enacted
by the Documentary Transfer Tax Act in 1967 before the Federal
Public Utility Holding Company Act of 1935 was repealed. This
bill also deletes the exemption for transfers of interest in
partnerships or other entities treated as partnerships for
federal tax purposes. This bill is author-sponsored.
3)The author argues that this bill "brings the Documentary
Transfer Tax Act into conformance with the definition of
'realty sold' under California property tax law. This
clarification is necessary because the change in ownership of
a legal entity does not require a recorded instrument that
would inform county recorders of the change in ownership and
subsequent transfer tax due. This bill would simply ensure
that the transfer tax is applied equally across all property
owners based on existing definitions in statute, eliminating
confusion about when transfer tax is due and streamlining
collection efforts."
4)The Documentary Transfer Tax Act does not contain a definition
of "realty sold". However, the courts have looked to the
AB 561
Page 4
definitions and interpretation applicable to assessment and
reassessment of property taxes to aid in the interpretation of
the Transfer Tax Act.
"While the Document Transfer Tax Act does not define 'realty
sold' that phrase is sufficiently similar to the phrase
'change in ownership' contained in the same code and governing
an analogous subject, to warrant that each phrase be defined
to have the same meaning." [Thrifty Corp. v. County of Los
Angeles., 210 Cal. App. 3d 881, 889 (1989)].
5)A 'change in ownership' is defined in current law as a
transfer in real property between a corporation, partnership,
or other legal entity, shareholder, or partner. When real
property is owned by a legal entity, the purchase or transfer
of ownership interests in that entity does not trigger a
change in ownership of the property, unless there is a 'change
in control' of the legal entity or one person or entity
acquires more than 50% of the ownership interest of the
entity. In other words, it is only deemed a change of
ownership when any person or entity obtains control, through
direct or indirect ownership, of more than 50% of the voting
stock of a corporation, or a majority ownership interest in
any other type of legal entity, that a reassessment of real
property owned by the acquired legal entity (or any of its
subsidiaries). Furthermore, when voting stock or other
ownership interests representing cumulatively more than 50% of
the total interest in a legal entity is transferred by any of
the 'original co-owners' in one or more transactions, the real
property that was previously excluded from reappraisal will be
reassessed, due to the definition of change in ownership.
6)Current law does not contain an explicit provision which
applies the documentary transfer tax to transfers of stock in
corporation which hold real property. Utilizing this
definition for documentary transfer taxes would allow the tax
to be collected on transfers when a change of ownership of
real property occurs through stock exchanges. Supporters of
the bill argue that this change makes the current tax system
more equitable by imposing the tax on all transfers of real
property, including those where if enough shares of stock are
sold that it constitutes a change of ownership. Opponents of
the bill argue that the change of stock is not an instrument
evidencing realty sold, so it is not appropriate to impose a
transfer tax in these instances.
AB 561
Page 5
Opposition argues that "The bill interjects the concept of
'change in ownership' into the sale, transfer or conveyance of
real property. Even prior to Proposition 13, when the stock
of a company changed hands, the transfer tax was not triggered
because there was no 'writing' evidencing 'realty sold'. The
legal entity that owned the property didn't change. The bill
expands the transfer tax to apply where there is no 'transfer'
- the sale of stock is not an instrument evidencing 'realty
sold' so the bill arbitrarily expands the definition of
'realty sold' to circumstances where there is no 'transfer'."
The author argues, "In California, County of Los Angeles v.
Southern California Edison Company, 112 Cal.App.4th 1108,
1122, fn. 7 (2003) and City of Huntington Beach v. Superior
Court, 78 Cal.App.3d 333, 340-341 (1978) both ruled that the
transfer tax is an excise tax on the exercise of the privilege
of conveying property, not on the privilege of recording an
instrument with the County Recorder."
7)The author and supporters of the bill argue that this bill
conforms statute with existing practice. Several counties and
cities have adopted the "change of ownership" definition
interchangeably with realty sold in order to impose
documentary transfer taxes.
8)According to The California Municipal Revenue Sources
Handbook, 2008 Edition, compiled by the League of California
Cities, all counties and cities in California imposed a
documentary transfer tax. Twenty-two charter cities impose a
property transfer tax. The 121 charter cities in California
have the ability to consider additional real property transfer
taxes beyond the rates general law cities are subject to in
existing law. The courts have found that the real property
transfer taxes enacted by charter cities do not violate
Proposition 13 or Proposition 62, which prohibits a
transaction tax on the sale of real property. As a result,
some charter cities have not only imposed additional rates,
but have made changes to the types of transfers the tax is
imposed upon.
According to the Los Angeles County Registrar-Recorder/County
Clerk, "The Los Angeles County Registrar-Recorder/County Clerk
(RRCC) began enforcing collection of Documentary Transfer Tax
on legal entity transfers where no document is recorded, but
AB 561
Page 6
which resulted a greater than 50% interest in control of the
legal entity being transferred. The collection is made
pursuant to the Los Angeles County Code, and California
Revenue and Taxation Code, and is consistent with case law
which defines 'realty sold' as having the same meaning as
changes in ownership for property tax purposes. As a result,
in an effort to collect the tax, the RRCC will continue to
identify, and send notices for, properties where a change of
ownership occurred which transferred a greater than 50%
controlling interest in the legal entity thereby creating a
liability for the Documentary Transfer Tax."
In addition to Los Angeles, the City and County of San
Francisco, Santa Clara County, and Napa County have imposed
similar changes to provide a definition for "realty sold"
consistent with the definition of "change of ownership".
9)Constitutional requirements for voter approval of tax measures
were initiated with the passage of Proposition 13 in 1978, and
solidified with the passage of Proposition 218 in 1996. The
latter measure clarified that general taxes for general
governmental purposes require approval of a majority of
voters, while special taxes for any specified purposes must be
approved by two-thirds of voters. The Committee may wish to
consider the application of Proposition 218 to transfer taxes.
The author and supporters of the bill argue that this bill
conforms statute to existing practice in California. The
Committee may wish to ask the author how many counties or
cities have adopted the change of ownership definition and at
what voter threshold, if any.
The Committee may also wish to consider how this bill is
impacted by Proposition 26 (2010) which specifies that an
increase in the level of tax should be subject to voter
approval. The issue of whether voter approval is necessary at
the local level to implement the changes in this bill may be
an issue that is ultimately up to the courts to decide. The
Committee may wish to consider if this bill will actually
achieve the author's stated intent to simply implement current
practice and will result in less legal uncertainty for local
governments.
10)Committee amendment: The Committee may wish to require cities
AB 561
Page 7
and counties to annually submit information regarding the
imposition of documentary transfer taxes to the Board of
Equalization.
11)Support arguments : Supporters argue that this bill would
result in a more consistent and fair tax system and conforms
statute to existing practice in California regarding the
collection of the documentary transfer tax.
Opposition arguments : Opposition argues that this bill will
allow counties and cities to impose a potentially massive tax
increase on commercial, industrial, and residential rental
property by arbitrarily expanding the definition of 'realty
sold' to circumstances where there is no transfer of real
property.
12)This bill is double-referred to the Committee on Revenue and
Taxation.
REGISTERED SUPPORT / OPPOSITION :
Support
American Federation of State, County and Municipal Employees
(AFSCME)
California Assessors' Association
California Professional Firefighters
California State Association of Counties
County Recorders' Association of California
Service Employees International Union (SEIU)
Opposition
Air Logistics Corporation
Associated Builders and Contractors of America
Associated General Contractors of America
Building Owners and Managers Association of California
California Apartment Association
California Attractions and Parks Association
California Building Industry Association
California Business Properties Association
California Chamber of Commerce
California Downtown Association
California Healthcare Institute
California Independent Petroleum Association
AB 561
Page 8
California Land Title Association
California Mortgage Bankers Association
California New Car Dealers Association
California Retailers Association
California Railroad Industry
California Tank Lines, Inc.
California Taxpayers Association
California Travel Association
Chemical Transfer Co., Inc.
Opposition (continued)
Commercial Real Estate Development Association
Family Business Association
Howard Jarvis Taxpayers Association
International Council of Shopping Centers
National Association of Real Estate Investment Trusts
National Federation of Independent Business
TechAmerica
Tenet Healthcare Corporation
West Coast Leasing, LLC
West Coast Lumber & Building Material Association
Western Manufactured Housing Communities Association
Analysis Prepared by : Misa Yokoi-Shelton / L. GOV. / (916)
319-3958