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 |
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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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