BILL ANALYSIS Ó AB 2622 Page A ASSEMBLY THIRD READING AB 2622 (Nazarian) As Amended May 19, 2016 Majority vote ------------------------------------------------------------------ |Committee |Votes|Ayes |Noes | | | | | | | | | | | | | | | | |----------------+-----+----------------------+--------------------| |Revenue & |5-0 |Ridley-Thomas, | | |Taxation | |Dababneh, Mullin, | | | | |O'Donnell, Quirk | | | | | | | |----------------+-----+----------------------+--------------------| |Appropriations |14-6 |Gonzalez, Bloom, |Bigelow, Patterson, | | | |Bonilla, Bonta, |Gallagher, Jones, | | | |Calderon, Daly, |Obernolte, Wagner | | | |Eggman, Eduardo | | | | |Garcia, Roger | | | | |Hernández, Holden, | | | | |Quirk, Santiago, | | | | |Weber, Wood | | | | | | | | | | | | ------------------------------------------------------------------ SUMMARY: Extends the Centralized Fleet Calculation Program for statewide assessment of certificated aircraft for property tax AB 2622 Page B 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: 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," as specified, for each assessment year of an air carrier's ground and flight time and arrival and departure activity shall consist equally of a week or group of weeks in January and a week or group of weeks in July. 4)Requires, on or before March 1, 2017, the Aircraft Advisory Subcommittee of the California Assessors' Association to do the following: AB 2622 Page C 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 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. AB 2622 Page D 2)Requires that real and personal property be taxed at the same rate (California Constitution Article XIII 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 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 AB 2622 Page E 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 pre-allocated 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 pre-allocated 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 pre-allocated 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 AB 2622 Page F 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 Board of Equalization (BOE), upon consultation with assessors, to designate for each assessment year the representative period 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. 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. 8)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 AB 2622 Page G 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. FISCAL EFFECT: According to the Assembly Appropriations Committee, unknown fiscal effect. 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. COMMENTS: 1)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]. 2)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 AB 2622 Page H 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 (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. 3)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. AB 1157 (Nazarian), Chapter 440, Statutes of 2015, extended the current assessment methodology for certificated aircraft for one more year through FY 2016-17. This bill extends the assessment methodology through FY 2019-20, streamlines some administrative procedures between aircraft carriers and county AB 2622 Page I assessors, and updates how the representative period used by county assessors in assessing the aircraft of the carrier is determined. 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 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. 5)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. 6)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 AB 2622 Page J 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. 7)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 --------------------------- <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. AB 2622 Page K 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. 8)A More Representative "Representative Period": Once the "lead" county has calculated the pre-allocated 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. This 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." 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 ensuing tax year. 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 first or second week of January following the lien date. In 2013, at the request of the California AB 2622 Page L Assessors Association, the BOE commenced an interested parties process on this issue. The key stakeholders argued the following: a) The airline industry contended 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. b) Assessors contended that many other states use the preceding 12 months prior to the lien date as a representative period. Moreover, a full year representative period better reflects the true value of the aircraft. 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. The Federal Aviation Administration (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. However, questions about this data set, such as how it could be used by assessors and the industry and how FAA can guarantee its availability into the future, remain unanswered. As an alternative, this bill requires the BOE to choose a representative period that incorporates a week (or group of weeks) in July, in addition to a week (or group of weeks) in January, as is currently common practice. Analysis Prepared by: Oksana Jaffe, Irene Ho / REV. & TAX. / (916) 319-2098 FN: AB 2622 Page M 0003049