BILL ANALYSIS                                                                                                                                                                                                    Ó



          SENATE COMMITTEE ON GOVERNANCE AND FINANCE
                         Senator Robert M. Hertzberg, Chair
                                2015 - 2016  Regular 

                              
          
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          |Bill No:  |AB 1157                          |Hearing    |7/15/15  |
          |          |                                 |Date:      |         |
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          |Author:   |Nazarian                         |Tax Levy:  |No       |
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          |Version:  |5/4/15                           |Fiscal:    |Yes      |
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          |Consultant|Grinnell                                              |
          |:         |                                                      |
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                 Property taxation:  certificated aircraft assessment



          Extends for one year the lead assessor methodology to value  
          certificated aircraft.


           Background and Existing Law

           Section 1 of Article XIII of the California Constitution  
          provides that all property is taxable unless explicitly exempted  
          by the Constitution or federal law.  While the Constitution  
          limits the maximum amount of any ad valorem tax on real property  
          at 1% of full cash value, and precludes reassessment unless the  
          property is newly constructed or changes ownership, assessors  
          value personal property each year.

          Generally, assessors value business personal property, such as  
          aircraft, by multiplying the taxpayer's cost of acquiring it by  
          a price index that measures inflation to estimate its  
          "reproduction cost new," an approximation of the cost to replace  
          the property at current market prices.  This "reproduction cost  
          new" is then multiplied by a "percent good factor" (a  
          depreciation factor) to provide an estimate of the depreciated  
          reproduction cost of the property, which becomes the taxable  
          value of the property for the fiscal year.  

          Assessors may only value certificated aircraft with "situs" in  
          California on a fleet basis, defined as all aircraft owned by  







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          the taxpayer by make and model.  For example, assessors must  
          value an airlines' entire A380 fleet if only one enters the  
          state, but doesn't include any of its 747's if none of them do,  
          regardless of the total number or value of A380s or 747s an  
          airline owns.  Once assessors calculate value, they must  
          apportion it among counties based on a weighted average of the  
          fleet's ground and flight time (75%) and arrivals and departures  
          (25%) measured only during the "representative period,"  
          currently designated by BOE as the second full in week in  
          January.  This apportioned fleet value is then multiplied by the  
          appropriate rate for the tax rate area in that county.

          Until 1998, state law did not prescribe a specific method for  
          assessors to determine the value of aircraft, resulting in years  
          of disagreements and litigation between assessors and airlines.   
          In 1998, the Legislature detailed a valuation methodology for  
          certificated aircraft which was presumed to equal the fair  
          market value of the aircraft for those years, enacting three  
          bills to codify a settlement agreement between several counties  
          and airline industry representatives (AB 1807, Takasugi; AB  
          2318, Knox; and SB 30, Kopp).  In 2003, the agreement expired,  
          and assessors again locally valued aircraft without specific  
          guidance from the Revenue and Taxation Code. 

          In 2006, assessors and the airlines again agreed on a new  
          valuation methodology.  Under the agreement, a "lead assessor"  
          values each airline's fleet (AB 964, Horton).  Instead of filing  
          property statements with each county, airlines file a single  
          consolidated statement with a single assessor designated by the  
          Aircraft Advisory Subcommittee of the California Assessors'  
          Association.  The measure established categories for mainline  
          jets, regional aircraft, production freighters, and converted  
          freighters, and set forth a valuation methodology for each.  The  
          bill also directed the lead assessor to audit the airline every  
          four years.  The new methodology provided that the aircraft  
          value was the lesser of:

                 A historical cost basis, including transportation and  
               improvement costs, as well as capitalized interest, with  
               specific provisions for leased aircraft, aircraft in a  
               sale/leaseback or assignment of purchase rights, or  
               aircraft acquired in bankruptcy, with specified  
               adjustments, or 









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                 10% off (for a fleet adjustment) on the wholesale prices  
               listed in the "Airliner Pricing Guide."  If the APG ceases  
               to exist, the Board of Equalization (BOE) must determine  
               the guide or adjustment.  

          AB 964 also directed assessors to analyze the cost to see if an  
          economic obsolescence allowance should apply.  To determine  
          economic obsolescence for mainline jets and regional aircraft,  
          the assessor calculates three factors for both the previous  
          calendar year and the past ten years: average net revenue per  
          seat mile, net load factor, and yield.  The assessor then  
          compares each factor's previous calendar year value with its  
          value for the past ten years to determine the amount of  
          difference.  The assessor then applies a weighted average of the  
          indicated percentage adjustments: net revenue per available seat  
          mile (35%), net load (35%), and yield (30%).  The assessor must  
          reduce the original cost by the percentage, but only if the  
          final economic obsolescence exceeds 10%.  AB 964 applied a  
          different economic obsolescence formula similar to the above for  
          freighters, except it uses net revenue per available ton mile  
          (50%) and ton load (50%) factors instead.  The measure sunset  
          after the 2010-11 fiscal year.

          After Governor Schwarzenegger vetoed the first bill that  
          extended the sunset (AB 311, Ma, 2009), he signed a similar bill  
          the next year (AB 384, Ma, 2010).  AB 384 extended the lead  
          assessor model and the valuation methodology until the 2015-16  
          fiscal year, but differed from AB 311 by:

                 Replacing language specifying value with a rebuttable  
               presumption, 

                 Allowing the taxpayer to rebut the presumption with  
               appraisals, invoices, and expert testimony, and 

                 Capping an aircraft's value at its original cost.

          With AB 384's sunset approaching, certificated aircraft will  
          revert to local assessment without a lead assessor on January 1,  
          2016, requiring each assessor where a plane lands to  
          independently value aircraft.  Assessors want to extend the  
          current lead assessor methodology for one year.










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           Proposed Law

           Assembly Bill 1157 extends the current lead assessor model for  
          assessing certificated aircraft by one year to apply through the  
          2016-17 fiscal year, eventually expiring on the January 1, 2017  
          lien date.  


           State Revenue Impact

           The Board of Equalization (BOE) states that AB 1157's revenue  
          impact is unknown.


           Comments

           1.  Purpose of the bill  .  According to the author, "The  
          provisions outlined in current law relating to the centralized  
          assessment of aircraft will sunset December 31, 2015.  Unless  
          extended, airlines would be required to file separate property  
          statements and submit duplicative aircraft fleet information in  
          every county in which they operated.  In addition each county  
          will be required to audit each carrier, if the air carrier's  
          assessment qualifies as a mandatory audit in that county.   
          Absent a uniform codified methodology, each county would have to  
          calculate the total aircraft fleet value.  Airlines would  
          inevitable face uncertainty and delays on the valuation of their  
          aircraft.  A centralized process simplifies the valuation and  
          taxation of certified aircraft, ensures statewide consistency in  
          the base value of an aircraft fleet and promotes administrative  
          efficiency for both carriers and counties.  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.   How to assess  ? Assessment of personal property, especially  
          certificated aircraft, is inherently difficult.  Not only are  
          planes valuable, which leads to a larger range of disagreement,  
          but the economic condition of the airline industry can change  








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          rapidly due to terrorist attacks, economic recessions, and  
          mergers, all of which have occurred in recent years.  The  
          Legislature initially codified an assessment methodology after  
          years of litigation resulted in settlement agreements.  AB 964's  
          methods of assessment were supposed to establish a very detailed  
          methodology based on either an easily knowable cost basis or a  
          well-known price index.  However, that bill also created a kind  
          of safety valve that would reduce values due to obsolescence  
          whenever a weighted average of three metrics fell 10% below its  
          average for the past ten years.  Some airlines appealed  
          assessors' valuations over different issues, including arguing  
          that assessors erred by using an incorrect period to calculate  
          the ten year average, incorrect comparison information, and  
          applied the incorrect base year.  Assessors disagreed, and  
          assessment appeals boards subsequently upheld the assessor's  
          valuations.  However, airlines subsequently filed suit in  
          several counties to challenge that determination, and to  
          preserve legal standing. 

          3.   Appeals.   Under current law, taxpayers can only appeal local  
          assessment appeals board decisions to superior court if they  
          believe assessment are illegal; issues of pure valuation must be  
          resolved administratively.  Additionally, even if taxpayers win  
          art one county assessment appeals board, its decisions aren't  
          binding on other counties.  However, the Constitution allows the  
          Legislature to authorize counties to create multi-county  
          assessment appeals boards.  

          4.   Embedded.   Another point of contention between assessors and  
          airlines is whether to value embedded software.  Assessors may  
          value storage media and basic operational programs, defined as  
          those fundamental and necessary to a computer functioning;  
          however, "computer programs" are expressly exempt (the statute,  
          crafted in 1972, refers to "punched cards, tapes, discs, or  
          drums").  In 1996, BOE implemented Property Tax Rule 152, which  
          interprets statute to include only the ROM-based kernel software  
          contained in a computer, and allowed operating system software  
          to be exempt from the property tax.  However, the grand bargain  
          represented in AB 964 and AB 384 was to maintain local  
          assessment of certificated aircraft, but not to include embedded  
          software in valuation.  AB 1157 extends this agreement to  
          appoint a lead assessor, but remain silent on embedded software.  

           5.   Related legislation  .  Earlier this year, the Committee  








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          approved SB 661 (Hill), which would have transferred assessment  
          from assessors to BOE in response to concerns from airlines  
          regarding the taxpayer compliance burden resulting from the lead  
          assessor model.  However, the Committee on Appropriations held  
          the measure on its suspense file.  


           Assembly Actions

           Assembly Floor                49-25

          Assembly Appropriations       12-5
          Assembly Revenue and Taxation   6-0

           Support and  
          Opposition   (7/9/15)


           Support  :  Los Angeles County Assessor Jeffrey Prang, California  
          Assessors' Association, California State Association of  
          Counties, California Special Districts Association, California  
          Tax Reform Association, Glendale City Employees' Association,  
          Humboldt County Board of Supervisors, League of California  
          Cities, Sacramento County Board of Supervisors, San Mateo County  
          Board of Supervisors, Service Employees International Union.  


           Opposition  :  None received.


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