BILL ANALYSIS Ó
AB 1157
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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
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<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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