BILL ANALYSIS                                                                                                                                                                                                    






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          Date of Hearing:  April 27, 2015





                     ASSEMBLY COMMITTEE ON REVENUE AND TAXATION


                                 Philip Ting, Chair





          AB 1157  
          (Nazarian) - As Introduced February 27, 2015


          


          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 fiscal year (FY) 2021-22. 


          Specifically, this bill:  


          1)Extends, until FY 2015-16, the application of the current  
            assessment methodology for determining the fair market value  
            (FMV) of certificated aircraft owned by commercial air  











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            carriers for property tax purposes and the rebuttable  
            presumption that the pre-allocated FMV of certified aircraft,  
            as calculated, is correct.    


          2)Extends, until December 31, 2021, the application of the  
            following provisions of law that otherwise are scheduled to  
            sunset on December 31, 2015:


             a)   Revenue and Taxation Code (RT&C) Section 441(l) that  
               requires a commercial air carrier to file one annual  
               property statement with a designated "lead" county, as  
               provided; 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)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. 


          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.











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          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.  Certificated aircraft is subject to property  
            taxation when in revenue service in California.  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.  Only an  
            allocated portion of the entire fleet's value ultimately taxed  
            to reflect actual presence in California's counties.  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 during the year.



          4)Prescribes a centralized assessment methodology for valuing  











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            certificated aircraft for FYs 2005-06 through 2015-16.  This  
            methodology 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 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)   A historical cost less depreciation basis with no  
               individual aircraft value exceeding the original price  
               paid; or,

             b)   The value referenced in the Winter edition of the  
               "Airline Price Guide," a commercially-prepared value guide  
               for aircraft, less 10%.  



            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, which accounts for 75%  
               of the ratio; and,

             b)   An arrivals-and-departures factor, which accounts for  
               25% of the ratio.  [Property Tax Rule 202 (c)].  











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            The sum of these factors yields the allocation ration, which  
            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.



          6)Specifies 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. 



          7)Requires the 'lead' county to transmit the property statement  
            related to an airport location to the situs county, and  
            provides that each county is responsible for valuing personal  
            property and fixtures at its particular airport locations. 

          8)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).  





          9)Allows an audit team comprised of staff from one to three  
            counties, as determined by the Aircraft Advisory Subcommittee  
            of the California Assessors' Association, to perform a  
            mandatory audit of a commercial air carrier once every four  
            years on a centralized basis.  The work performed by the audit  











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            team is deemed to have been made on behalf of each county for  
            which a mandatory audit would otherwise be required under RT&C  
            Section 469.  (R&TC Section 1153.5). 

          1)Provides that the existing valuation methodology for  
            certificated aircraft applies for FYs 2005-06 through 2015-16,  
            and is repealed as of December 31, 2015. 

          FISCAL EFFECT:  Unknown. 


          COMMENTS:  



           1)Author's Statement  .  The author has provided the following  
            statement in support of this bill:


          "AB 1157 extends for five years the sunset date for the  
            centralized determination of the fair market value and  
            taxation of certificated aircraft.  By extending the sunset  
            date, this bill ensures aircraft continues to be valued  
            uniformly and taxed efficiently throughout the state.

          "In extending the sunset date for the assessment of certified  
            aircraft, AB 1157 continues to eliminate the need for multiple  
            tax returns reporting the same information, and allows  
            assessors to carry out their mandated responsibility to fairly  
            assess all taxable property, within their jurisdiction, in an  
            efficient manner.

          "It is imperative that counties continue to assess aircraft in  
            an administratively efficient manner as these assessments  
            translate into approximately $30 million in local revenue."


           2)Arguments in Support  .  The proponents state that current law  
            "permits county assessors and commercial air carriers to use a  











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            streamlined administrative procedure" and allows "commercial  
            air carriers operating in multiple airport locations in  
            California to file a single consolidated property statement  
            (tax return) with a designated 'lead' county."  The proponents  
            argue that a codified methodology "helps reduce conflict."   
            Finally, the proponents assert that by extending the  
            provisions for five more years, "AB 1157 would provide a  
            period of stability and allow periodic methodology  
            re-evaluation and adjustment" and would ensure "continued  
            uniform certificated aircraft assessments for each carrier  
            statewide." 



           3)Arguments in Opposition  .  The opponents observe that of the  
            "30 states that tax property of commercial air carriers only  
            four states - Alaska, Indiana, Massachusetts and California -  
            assess locally."  The opponents also assert that existing  
            framework for assessing commercial airlines for property tax  
            purposes is a "dated and inefficient process, which is costly  
            and cumbersome to the airlines and the assessors" and "an  
            extraordinary an unnecessary burden on the airline industry."   
            The opponents note that within the past five years, 45 appeals  
            have been filed by the airlines and 45 appeals have been  
            denied by county assessors, who review and determine the  
            outcome of those appeals."  The existing approach "has led to  
            litigation rather than achieving resolution at the county  
            level."  Finally, the opponents argue that while "the process  
            was improved over the process in place prior to 2005, the  
            efficiencies achieved with filing in one location in  
            California, and working with one entity logically provide  
            greater cost savings for the counties as well as taxpayers." 



           4)Background  .  Prior to 1999, no specific assessment methodology  
            procedure for valuing certificated aircraft or the carrier's  
            possessory interest in the publicly owned airport existed in  
            California.  In 1998, a group of counties and airline industry  











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            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].   



           5)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 and taken into account:  (a)  
            acquisition cost, (b) price index, (c) percent good factor,  
            and (d) economic obsolescence.  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.  However,  
            AB 964 specified that the revised formula for determining the  
            fair market value of certificated aircraft of a commercial air  
            carrier applied only for FYs 2005-06 through 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.  












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          In 2010, a bill was introduced to extend the valuation  
            methodology and centralized assessment provisions temporarily  
            to the FY 2015-16.  [AB 384 (Ma), Chapter 228, Statutes of  
            2010.]  AB 384 also revised the valuation provisions to create  
            a rebuttable presumption of correctness for the FMV of  
            certificated aircraft determined under the assessment  
            methodology.  AB 384 specified that the FMV may be rebutted by  
            evidence including appraisals, invoices, and expert testimony.  
             Finally, AB 384 provided that the value of an individual  
            aircraft assessed to the original owner may not exceed its  
            original cost from the manufacturer.


           6)Centralized Assessment System  .  Under existing law, which this  
            bill proposes to extend, a "lead" county is designated by the  
            Aircraft Advisory Subcommittee of the California Assessors'  
            Association for each commercial air carrier operating  
            certificated aircraft in California.  The "lead" county is  
            required to calculate an unallocated fleet value of the  
            carrier's certificated aircraft for each make, model, and  
            series, as provided.  Once the fleet value is calculated, it  
            is transmitted to other counties, which in turn will determine  
            their allocated portions of the fleet value based on the  
            flight data for each county.  The allocation process limits  
            each county's assessment to reflect the aircraft's physical  
            presence in that county. 


          Existing law also allows commercial air carriers operating in  
            multiple California airports to file a single consolidated  
            property statement with a "lead" county.  In turn, the "lead"  
            county must transmit return information related to  
            non-aircraft personal property and fixtures to other counties  
            where the air carrier operates.  The audit procedures are also  
            centralized:  an audit team directed by the "lead" county will  
            audit the air carrier once every four years on a centralized  
            basis.  
           











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           7)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.<1>  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.  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.  Furthermore,  
            assessors would be able to use any valid method to determine  
            FMV, such as, for example, cost, income, comparable sales, and  
            published market value guides.  





           8)The Rebuttable 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.  It is presumed by both the assessor and taxpayer  
            that the existing 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  
          ---------------------------
          <1> Recently, several air carriers have commenced legal action  
          challenging the calculations of economic obsolescence under R&TC  
          Sections 401.17(a)(1)(C) and (D).  This bill, however, does not  
          propose to modify the economic obsolescence provisions. 










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            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.  Consistent with the existing law, this bill  
            would allow 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.  According to the author, the best  
            solution is for the Legislature to extend the existing  
            valuation methodology to arrive at a fair market value for  
            certificated aircraft, including the rebuttable presumption of  
            correctness of the value.  If the existing centralized  
            assessment provisions are not extended, then the burden of  
            proof regarding the correctness of the assessment will shift  
            to the air carrier challenging the assessed value. 

           9)Related Legislation  .  SB 661 (Hill) would transfer assessment  
            jurisdiction for commercial air carrier personal property,  
            including certificated aircraft, to the BOE.  SB 661 is  
            pending hearing by the Senate Appropriations Committee. 


          REGISTERED SUPPORT / OPPOSITION:

          Support





          Glendale City Employees Association


          Organization of SMUD Employees













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          San Bernardino Public Employees Association


          San Diego County Court Employees Association


          San Luis Obispo County Employees Association


          Service Employees International Union (SEIU)





          Opposition





          Airlines for America


          Alaska Airlines


          Southwest Airlines


          United Airlines



          Analysis Prepared by:Oksana Jaffe / REV. & TAX. / (916) 319-2098















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