BILL ANALYSIS                                                                                                                                                                                                    Ó






                                                                    AB 2622


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          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  











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          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:











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             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.











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          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  











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            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  











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               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  











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            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  











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            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  











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            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  















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            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. 










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            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  











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            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:  











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