BILL ANALYSIS Ó
AB 2622
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Date of Hearing: April 18, 2016
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Sebastian Ridley-Thomas, Chair
AB 2622
(Nazarian) - As Amended April 12, 2016
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) 2019-20. Specifically, this
bill:
1)Extends, until FY 2019-20, 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 certificated
aircraft, as calculated, is correct.
2)Extends, until December 31, 2019, the application of the
following provisions of law that otherwise are scheduled to
sunset on December 31, 2016:
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a) Revenue and Taxation Code (R&TC) Section 441(l) that
requires a commercial air carrier to file one annual
property statement with a designated "lead" county, as
provided; and,
b) R&TC 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)Specifies that the representative period for each assessment
year of an air carrier's ground and flight time and arrival
and departure activity is determined by the air carrier's
flight operations recorded by the Federal Aviation
Administration (FAA) during the prior calendar year.
4)Requires, on or before March 1, 2017, the Aircraft Advisory
Subcommittee of the California Assessors' Association to do
the following:
a) Designate two contacts in each lead county assessor's
office for each commercial air carrier to address reporting
and data issues; and,
b) Establish best practices for the effective
administration of the lead county system, audit process,
and methods to evaluate converted freighters.
5)Requires the lead county assessor's office to transmit the
property statement received from a commercial air carrier to
the assessor of each county in which the carrier's personal
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property is located or has acquired situs.
6)Requires a county assessor that receives a property statement
from the lead county to first direct questions to the lead
county assessor's office, and only question the commercial air
carrier if the lead county assessor's office is unable to
provide the answer.
7)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.
2)Requires that real and personal property be taxed at the same
rate (Section 2 of Article XIII of the California
Constitution). 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. The property tax applicable to personal property,
however, 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
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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 2005-06 through 2016-17, and is
repealed as of December 31, 2016. 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,
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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 during a representative period. 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)].
The sum of these factors yields the allocation ratio, 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.
5)Requires the BOE, upon consultation with assessors, to
designate for each assessment year the representative period
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of an air carrier's ground and flight time and arrival and
departure activity used in the allocation formula.
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
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).
FISCAL EFFECT: Unknown
COMMENTS:
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1)Author's Statement : The author has provided the following
statement in support of this bill:
By extending the sunset date for the assessment of
certified aircraft, AB 2622 continues to allow assessors to
carry out their mandated responsibility to fairly assess
all taxable property, within their jurisdiction, in an
efficient manner. Additionally, to better assess and
reflect the carrier actual tax nexus, AB 2622 changes the
representative period methodology by requiring it to be
based on the carrier's entire year's flight activity.
Further, AB 2622 makes several administrative changes that
streamline and reduce workload for the airline industry.
Overall, it is imperative that counties continue to assess
aircraft in an administratively efficient manner as these
assessments translate into approximately $80 million in
local revenue.
2)Arguments in Support : Proponents of this bill state that it
contains improvements "developed during extensive stakeholder
meetings [to] make changes to ease the administrative burden
on taxpayers while clarifying the lead county assessment
system." Additionally, assessors do not feel the current
representative period "accurately represents the true [flight]
activity throughout the year?. The FAA has the most accurate
and complete information covering aircraft activity. Since
this information is available electronically, it can be
integrated into assessors' appraisal processes. This change
will result in more equitable assessments."
3)Arguments in Opposition : Opponents of this bill state that
"California remains an outlier in its approach to property tax
assessment of commercial aircraft, as commercial airlines must
file in every county within which we fly, despite the fact the
law provides for a specific, formula-driven assessments made
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on the exact same fleet of aircraft." Opponents maintain that
this bill does not provide consensus and "significantly
increases the burden to provide information to local
assessors, and potentially increases our property tax
assessment."
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
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,
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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.
In 2010, AB 384 (Ma), Chapter 228, Statutes of 2010, extended
the valuation methodology and centralized assessment
provisions temporarily to the FY 2015-16. 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
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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.
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.
---------------------------
<1> In 2013, several air carriers have commenced legal action
challenging the calculations of economic obsolescence under R&TC
Sections 401.17(a)(1)(C) and (D). The lawsuits have been
consolidated into one case pending in Orange County Superior
Court. This bill, however, does not propose to modify the
economic obsolescence provisions.
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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
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. 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)Working Together Towards Best Practices : AB 1157 (Nazarian),
Chapter 440, Statutes of 2015, extended the current assessment
methodology for certificated aircraft for one more year in
hopes that the airline industry and county assessors could
reach consensus on how the methodology could be reformed
during the interim. The author's office hosted a series of
meetings with the airline industry, county assessors, and
Assembly and Senate staff. Although a long-term solution was
not identified, this bill contains the following provisions
agreed upon by the airline industry and county assessors:
a) Extension of the sunset date for the centralized
assessment methodology;
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b) Identification of key persons in the assessor's office
for airlines to contact if they are having e-filing issues
or need other help;
c) Direction to the lead county to share the airlines'
property statements with local assessors, and to local
assessors to pose any questions to the lead county first,
prior to contacting the airline; and,
d) Establishment of best practices for the effective
administration of the lead county system, audit process,
and methods to evaluate converted freighters.
1)A More Representative "Representative Period" : This bill also
contains a provision that was not agreed upon by the airline
industry and county assessors, related to how the
representative period used in the centralized assessment
methodology is determined. Once the "lead" county has
calculated the preallocated value of the aircraft, the
information is transmitted to local counties to determine
their allocated portion of the fleet based on the flight data
for the particular county. The allocation formula is
determined by the frequency and amount of time that an air
carrier's aircraft makes contact and maintains situs within a
county during a representative period, and is the sum of a
ground and flight time factor and an arrivals-and-departures
factor.
Under current law, the representative period is determined by
the BOE on or before January 1 of each year, upon consultation
with the assessors of counties where air carriers' aircraft
make regular physical contact. January 1 is also the lien
date by which the assessor establishes the assessed value and
owner of property for tax purposes. Over the last 20 years,
the representative period selected has most often been the
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first or second week of January following the lien date. In
2013, at the request of the California Assessors Association,
the BOE commenced an interested parties process on this issue.
The airline industry put forth that the representative period
should be as close to the lien date as possible to ensure that
information reported by airlines will most accurately reflect
the activity of assessed aircraft. Assessors put forth that
many other states use the preceding 12 months prior to the
lien date as a representative period; prior to the lien date's
shift to January 1 from March 1 in 1997, the representative
period had either included the lien date or took place prior
to the lien date - the representative period only shifted to
after the lien date to avoid capturing higher than average
flight activity from the Christmas and New Year travel season.
The BOE concluded that there was no compelling reason to
change the representative period since its historical practice
has been to select one week in January.
The purpose of the representative period is to obtain air
carrier operational data that can reasonably be expected to
reflect the average activity of the carrier for the ensuring
tax year. When the concept of the representative period was
established in 1968, technological limitations provided that
utilizing an entire year's past flight activity would be too
burdensome. However, the FAA now provides records of all
flight data on its public Web site that may be used to derive
a more accurate representative period, and thus, more accurate
assessment of aircraft. Since technological advances allow a
"lead county" to more easily retrieve data from the FAA for
local counties to use in determining aircraft activity, this
bill proposes that the representative period be derived from
FAA data during the calendar year prior to assessment.
2)Related Legislation : SB 1329 (Hertzberg) would extend the
sunset date for the centralized assessment methodology for an
unspecified number of years, and allows for a trial de novo
for commercial air carriers in a refund lawsuit. SB 1329 is
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pending hearing by the Senate Committee on Appropriations.
AB 1157 (Nazarian), Chapter 440, Statutes of 2015, extended
the sunset date for the centralized assessment methodology
from FY 2015-16 to FY 2016-17.
SB 661 (Hill) would have transferred assessment jurisdiction
for commercial air carrier personal property, including
certificated aircraft, to the BOE. SB 661 was held by the
Senate Appropriations Committee and subsequently amended for a
different purpose.
REGISTERED SUPPORT / OPPOSITION:
Support
Assessor of Los Angeles County, Jeffrey Prang
Assessor of Santa Clara County, Larry Stone
California Assessors' Association
Opposition
Airlines for America
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Alaska Airlines
American Airlines
California Taxpayers Association
Delta Airlines
George Runner, Member, Board of Equalization
Southwest Airlines
United Airlines
Analysis Prepared by:Irene Ho / REV. & TAX. / (916) 319-2098,
Oksana Jaffe / REV. & TAX. / (916) 319-2098