BILL ANALYSIS                                                                                                                                                                                                    ”






                                                                      AB 1157


                                                                       Page A


          ASSEMBLY THIRD READING


          AB  
          1157 (Nazarian)


          As Amended  May 4, 2015


          Majority vote


           ------------------------------------------------------------------- 
          |Committee       |Votes |Ayes                |Noes                  |
          |                |      |                    |                      |
          |                |      |                    |                      |
          |----------------+------+--------------------+----------------------|
          |Revenue &       |6-3   |Ting, Dababneh,     |Brough, Patterson,    |
          |Taxation        |      |Gipson, Roger       |Wagner                |
          |                |      |HernŠndez, Mullin,  |                      |
          |                |      |Quirk               |                      |
          |                |      |                    |                      |
          |----------------+------+--------------------+----------------------|
          |Appropriations  |12-5  |Gomez, Bloom,       |Bigelow, Chang,       |
          |                |      |Bonta, Calderon,    |Gallagher, Jones,     |
          |                |      |Daly, Eggman,       |Wagner                |
          |                |      |Eduardo Garcia,     |                      |
          |                |      |Holden, Quirk,      |                      |
          |                |      |Rendon, Weber, Wood |                      |
          |                |      |                    |                      |
          |                |      |                    |                      |
           ------------------------------------------------------------------- 


          SUMMARY:  Extends the Centralized Fleet Calculation Program for  
          statewide assessment of certificated aircraft for property tax  
          purposes until Fiscal Year (FY) 2016 to 2017. 












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          Specifically, this bill:  


          1)Extends, until FY 2016 to 2017, the application of the current  
            assessment methodology for determining the fair market value  
            (FMV) of certificated aircraft owned by commercial air 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, 2016, 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  
            State Mandates Commission 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  











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            valorem taxes on real property to 1% of the full cash value of  
            that property as set forth in the California Constitution.  


          2)Requires that real and personal property be taxed at the same  
            rate (California Constitution Article XIII, Section 2).   
            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  
            certificated aircraft for FYs 2005 to 2006 through 2015 to 2016.  











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             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 FMV 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 FMV 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 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 to 2006 through 2015  
            to 2016, and is repealed as of December 31, 2015. 











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          FISCAL EFFECT:  According to the Assembly Appropriations  
          Committee, unknown; absent a codified methodology, there can be no  
          assurance that the values determined by individual county  
          assessors would be the same, higher, or lower than they are under  
          the current methodology.  Aggregate property tax revenue from  
          commercial aircraft in 2014 was approximately $80 million.


          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  











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               aircraft in an administratively efficient manner as  
               these assessments translate into approximately $30  
               million in local revenue.



          2)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  
            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 to 1999 to FY 2002 to 2003 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].   



          3)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 Aircraft Performance  
            Group, 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 FMV  











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            of certificated aircraft of a commercial air carrier applied  
            only for FYs 2005 to 2006 through 2010to 2011.  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.  



            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.



          4)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. 












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            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. 


          5)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  
          ----------------------------


          <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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            to use any valid method to determine FMV, such as, for example,  
            cost, income, comparable sales, and published market value  
            guides.  


          6)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  
            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 FMV 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 FMV 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. 


          7)Related Legislation.  SB 661 (Hill) of the current legislative  
            session, would transfer assessment jurisdiction for commercial  
            air carrier personal property, including certificated aircraft,  
            to the Board of Equalization.  SB 661 is currently pending in  
            the Senate Appropriations Committee. 














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          Analysis Prepared by:                                               
                          Oksana Jaffe / REV. & TAX. / (916) 319-2098  FN:  
          0000433