BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
------------------------------------------------------------------
|Bill No: |AB 2622 |Hearing |6/29/16 |
| | |Date: | |
|----------+---------------------------------+-----------+---------|
|Author: |Nazarian |Tax Levy: |No |
|----------+---------------------------------+-----------+---------|
|Version: |5/19/16 |Fiscal: |Yes |
------------------------------------------------------------------
-----------------------------------------------------------------
|Consultant|Grinnell |
|: | |
-----------------------------------------------------------------
Property taxation: certificated aircraft assessment
Extends the lead county assessor methodology for valuing
certificated aircraft; enacts changes to improve the
administration.
Background
Section One of Article XIII of the California Constitution
provides that all property is taxable and shall be assessed at
the same percentage of fair market value, 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 like certificated
aircraft each year. The Constitution requires that property be
assessed in the county, city, or district in which it is
situated. While the Legislature first directed county assessors
to tax property in 1849, assessors in different counties often
applied different tax rates and methods of assessment. To
remedy the lack of uniformity, the California Constitution of
1879 created the Board of Equalization (BOE) to equalize rates
and assessment practices among counties. In 1910, voters
amended the Constitution to direct BOE to value property owned
by railways, companies selling gas and electricity, or telephone
companies, as these companies own property that crosses county
AB 2622 (Nazarian) 5/19/16 Page 2
of ?
lines. The Constitution additionally allows the Legislature to
authorize BOE assessment of property owned or used as "public
utilities."
Assessors may only value certificated aircraft with situs in
California on a fleet basis, defined as aircraft operated by a
domestic or foreign air carrier engaged in passenger or freight
service 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 a specific model the taxpayer
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 to determine tax due. Certificated
aircraft doesn't include personal planes.
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 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 can instead file
a single consolidated statement with one lead assessor
designated by the Aircraft Advisory Subcommittee of the
California Assessors' Association, which usually rotates every
three years. The bill also limited audits to one performed by a
multi-county audit team. Currently, assessors from ten counties
(Alameda, Fresno, Los Angeles, Orange, Riverside, Sacramento,
San Bernardino, San Diego, San Mateo, and Santa Clara) assess
the aircraft of each airline, and lead the appropriate audit
AB 2622 (Nazarian) 5/19/16 Page 3
of ?
teams.
To establish value, AB 964 established categories for mainline
jets, regional aircraft, production freighters, and converted
freighters, and detailed a valuation methodology for each. The
new methodology provided that the aircraft value was the lesser
of:
A historical cost basis, or
10% off (for a fleet adjustment) 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 included a safety valve to account for economic
obsolescence, where assessors analyze the change in three
variables to determine whether larger economic forces are
diminishing the aircraft's value. 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 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 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.
Last year, the Legislature enacted AB 1157 (Nazarian), which
extended the sunset by one year to the 2016-17 fiscal year.
However, the lead assessor methodology will sunset for the
AB 2622 (Nazarian) 5/19/16 Page 4
of ?
2017-18 fiscal year unless the Legislature extends it, in which
case assessors will again value certificated aircraft based on
fair market value without specific guidance from state law.
Additionally, assessors have identified several potential
improvements to the current system to improve administration.
Proposed Law
Assembly Bill 2622 extends the lead assessor methodology for
valuing certificated aircraft for three years, including the
valuation method, the consolidated property statement, and
single audit by the multicounty team headed by the lead
assessor. The measure also makes other changes to the process
of valuing certificated aircraft for property tax purposes,
including:
Specifying the representative period, or the period in
which an airline fleet's ground and flight time and
arrivals and departures are measured to apportion fleet
value between counties, as equally consisting of a week or
weeks in both January and July,
Requiring the Aircraft Advisory Subcommittee of the
California Assessors Association to designate two contacts
in each lead assessor's office for each of these carriers
that will be available to address reporting issues and the
California Assessor's Standard Data Record network, and
establishing best practices for the effective
administration of the lead county system, audit process,
and methods to evaluate converted freighters.
Requiring the lead county assessor's office to
transmit the property statement to the assessor of each
county in which the personal property of the commercial
air carrier is located or has acquired situs, and
Providing that a county assessor that receives a
property statement must first direct questions about the
contents of the property statement to the lead county
assessor's office, and if the lead county assessor's
office is unable to provide an answer, may only then
AB 2622 (Nazarian) 5/19/16 Page 5
of ?
direct questions to the commercial air carrier that filed
the property statement.
State Revenue Impact
According to BOE, the revenue impact of extending the sunset
date on provisions in current law instead of allowing them
expire 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 on December 31, 2016.
Without centralization, 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.
Absent a uniform codified methodology, each county would have to
calculate the total aircraft fleet value, and values would
likely vary from county to county. Airlines would inevitably
face uncertainty and delays on the valuation of their aircraft.
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.
Further, AB 2622 makes several administrative changes that
streamline and reduce workload for the airline industry. These
changes ensure that the non-lead counties contact lead counties
first with questions on filings, before contacting commercial
air carriers. Additionally, AB 2622 requires assessors, in
collaboration with the airline industry, to establish best
practices for the effective administration of the lead county
system. This bill also requires them to designate two points of
contacts that will be able to address reporting/filing issues.
To better assess and reflect the carrier actual tax nexus, AB
2622 also changes the representative period methodology by
requiring it to be based equally on the carrier's flight
activity in the week or groups of weeks in January and July. 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.
AB 2622 (Nazarian) 5/19/16 Page 6
of ?
2. Valuation . 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
rapidly due to terrorist attacks, economic recessions, and
mergers, among others, 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
eliminate or reduce disagreements because they rely on either a
knowable cost basis or a well-known price index, with a safety
valve that would reduce values due to economic obsolescence.
However, disagreements continue: some airlines appealed some
lead assessors' valuations, arguing that assessors didn't apply
the economic obsolescence formula correctly. 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, with no court yet rendering a decision.
Additionally, some assessors argue that the current methodology
undervalues aircraft, and propose instead to eliminate the 10%
discount from the Airline Price Guide, or change the
representative period from the currently designated one week
period in January to a year-round measure that more accurately
captures airlines' presence in this state. Notwithstanding this
ongoing dispute, AB 2622 proposes to extend the current
methodology for three years while seeking to make the existing
lead assessor model easier to administer. The Committee may
wish to consider whether the current methodology accurately
values certificated aircraft, and if so, for how many years
should the Legislature extend it.
3. Location, location . In addition to placing the appellate
authority for locally-assessed property taxes with county boards
of supervisors sitting as the county board of equalization
(Article XIII, Section 16), the Constitution also requires that
property be assessed in the jurisdiction in which it's situated
(Article XIII, Section 14). Under the lead assessor model for
certificated aircraft, one assessor values one airline's fleet,
then transmits this value to assessors in other counties where
the aircraft has situs. The non-lead county assessor is still
solely responsible for enrolling the value for that county, and
is not required to use this value, but almost always do. In
AB 2622 (Nazarian) 5/19/16 Page 7
of ?
discussing the current lead assessor model, Legislative Counsel
Opinion #1523620 from 2015 confirms that the official appraisal
of a property's value must be performed by the city, county, or
district where the property has situs.
4. Of horses and water . While the law also requires airlines
to file "one signed property statement for personal property at
all airport locations and fixtures at all airport locations,"
all carriers have not chosen to do so. With respect to flight
activity data, some airlines segregate flight activity
information by airport location and file all the information
with the lead county, while others report flight activity
directly to each county. With respect to nonaircraft personal
property and fixtures, many airlines continue to file with each
county. Additionally, airlines can file their returns
electronically via the California Assessor's Standard Data
Record network. Because some airlines experienced e-filing
difficulties, this bill requires that airlines be provided the
names of persons to contact for assistance.
5. Being converted . AB 2622 directs the Aircraft Advisory
Subcommittee of the California Assessors Association to
establish methods to evaluate converted freighters. However,
with state law setting forth a specific assessment process and
valuation methodology, the bill's direction may not have much
effect. Instead, the measure could strike sections of law
detailing the valuation of converted freighters, and instead
direct assessors to value them based on the same formula as
production freighters.
6. Related legislation . Last year, the Committee approved SB
661 (Hill), which required BOE to assess airline personal
property, including certificated aircraft, but the measure was
subsequently held on the Senate Appropriations Committee's
suspense file. The Legislature subsequently enacted AB 1157
(Nazarian), which extended the current valuation methodology
until the 2016-17 fiscal year. Last autumn, Assemblymember
Nazarian convened several meetings to discuss this issue;
however, disagreements between assessors and airlines continue.
This year, Senator Hertzberg introduced SB 1329, which extends
the lead assessor methodology for valuing certificated aircraft
like AB 2622, while also allowing trial de novo for suits for
refunds of locally-assessed property taxes on certificated
aircraft. The Committee approved the measure, but it was
AB 2622 (Nazarian) 5/19/16 Page 8
of ?
subsequently amended to remove its trial de novo provisions, and
was recently approved unanimously by the Assembly Revenue and
Taxation Committee.
Assembly Actions
Assembly Revenue and Taxation 5-0
Assembly Appropriations 14-6
Assembly Floor 50-28
Support and
Opposition (>)
Support : Delta Air Lines, San Luis Obispo County Assessor Tom
Bordanaro, San Mateo County Assessor Mark Church, Stanislaus
County Assesor Don H. Gaekle, Los Angeles County Assessor
Jeffrey Prang, Placer County Assessor Kristen Spears, California
Assessors Association, California Special Districts Association,
California State Association of Counties, Los Angeles County
Board of Supervisors.
Opposition : None received.
-- END --