BILL ANALYSIS Ó
SENATE COMMITTEE ON APPROPRIATIONS
Senator Ricardo Lara, Chair
2015 - 2016 Regular Session
AB 2622 (Nazarian) - Property taxation: certificated aircraft
assessment
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|Version: August 2, 2016 |Policy Vote: GOV. & F. 7 - 0 |
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|Urgency: No |Mandate: Yes |
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|Hearing Date: August 8, 2016 |Consultant: Robert Ingenito |
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This bill meets the criteria for referral to the Suspense File.
Bill
Summary: AB 2622 would extend the lead county assessor
methodology for valuing certificated aircraft, with specified
changes related to administration.
Fiscal
Impact:
The precise revenue impact of this bill relative to
current law is unknown. Property tax revenues for the
additional three years utilizing the lead assessor
methodology (as proposed to be modified) could be higher or
lower than what would have occurred absent the bill.
Approximately 50 percent of property tax revenues statewide
accrue to schools, which generally offsets state General
Fund obligations pursuant to Proposition 98. Consequently,
any change in the school share of property tax revenues
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that is attributable to the bill's impact on assessed
values would, in turn, impact General Fund expenditures.
BOE's costs to implement the bill would be minor and
absorbable.
Background: All property, real and personal, is subject to property tax,
unless a specific constitutional or statutory exemption applies.
The Constitution limits the maximum amount of any ad valorem tax
on real property at 1 percent of full cash value, and precludes
reassessment unless the property is newly constructed or changes
ownership; in contrast, county assessors value personal
property, such as certificated aircraft, annually. The
Legislature first directed county assessors in 1850 to tax
property; however, assessors in different counties often applied
different tax rates and methods of assessment. The
inconsistencies were especially acute between counties dominated
by mining and agriculture. As a response, the California
Constitution of 1879 created BOE to equalize property tax rates
and assessment practices among counties. In 1910, voters amended
the Constitution to direct BOE to tax certain property that
crossed county lines, including that owned by railways, firms
selling gas and electricity, or telephone companies. The taxes
were exclusively levied for state purposes on a gross receipts
taxation basis. In 1933, the constitution was amended again and
the 'in lieu" gross receipts taxation on public utilities was
substituted with the ad valorem assessment by BOE that was
allocated to the local jurisdictions according to situs.
Valuing Certificated Aircraft. Generally, assessors value
business personal property, such as aircraft, by multiplying the
taxpayer's cost of acquiring it by an inflation adjustment to
estimate 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.
Certificated aircraft used by air carriers is subject to
property tax when in revenue service in the State. Assessors may
only value certificated aircraft (defined as aircraft operated
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by a domestic or foreign air carrier engaged in passenger or
fleet service) with "situs" in California on a fleet basis. This
means that the assessed value basis is not the value of any
single aircraft owned by an air carrier, but rather the value of
all aircraft of each type that is flown into the State. Aircraft
regularly fly in and out of California and the various
California counties with major airports; typically no single or
particular aircraft remains located in the State on a permanent
basis. Under the "fleet" concept, aircraft types that have
gained situs in California by their entry into revenue service
in this state are valued as a fleet, while only an allocated
portion of the entire fleet's value is ultimately taxed to
reflect actual presence in California's counties. For example,
assessors must value an airlines' entire A380 fleet if only one
enters the State, but doesn't value any of its 747's if none of
them do so, regardless of the total number or value of A380s or
747s the airline owns. Once assessors calculate value, they
must apportion it among counties based on a weighted average of
(1) the fleet's ground and flight time (75 percent), and (2)
arrivals and departures (25 percent) measured only during the
"representative period," currently designated by BOE as one full
week in January, with the selected week varying. This
apportioned fleet value is then multiplied by the appropriate
rate for the tax rate area in that county.
Prior to January 1, 1999, California law did not specify an
assessment methodology for valuing certificated aircraft, or for
valuing the carrier's taxable possessory interest in the
publicly owned airport in which the aircraft operated. In
1997-98, a group of counties and air carrier industry
representatives met to resolve property tax issues associated
with air carrier-owned and -used property. The end result was a
written settlement agreement to dispose of outstanding
litigation and appeals over the valuation of airport possessory
interest assessments and certificated aircraft. The Legislature
codified the settlement agreement in a three-piece package:
Aircraft Valuation Methodology and Monetary Settlement.
AB 1807 (Takasugi, Chapter 86, Statutes of 1998) outlined
the valuation procedures for certificated aircraft until
2003 and provided $50 million in tax credits against future
tax liabilities, as well as extensive uncodified
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legislative findings and declarations.
Airport Possessory Interests. AB 2318 (Knox, Chapter 85,
Statutes of 1998) specified the assessment methodology for
valuing the air carrier's taxable possessory interest in
publicly-owned airports.
Tax Credits. SB 30 (Kopp, Chapter 87, Statutes of 1998)
added general purpose provisions to allow counties and
taxpayers to enter into written settlement agreements
granting taxpayers tax credits.
In 2003, the agreement expired, and assessors again locally
valued aircraft without specific guidance from state law. In
2006, assessors and the airlines again agreed on a new valuation
methodology (AB 964, Horton, Chapter 699, Statutes of 2005), and
directed a "lead assessor" to value each airline's fleet.
Instead of filing property statements with each county, airlines
filed a single consolidated statement with a single assessor
designated by the Aircraft Advisory Subcommittee of the
California Assessors' Association, which rotates generally every
three years. AB 964 established categories for various types of
aircraft (passenger aircraft and freighter aircraft), 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
10 percent off (for a fleet adjustment) on the wholesale
prices listed in the "Airliner Pricing Guide," If the APG
ceases to exist, BOE determines the guide or adjustment.
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AB 964 also included an adjustment factor 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. Next, the
assessor applies a weighted average of the indicated percentage
adjustments: net revenue per available seat mile (35 percent),
net load (35 percent), and yield (30 percent). The assessor must
reduce the original cost by the percentage, but only if the
final economic obsolescence exceeds 10 percent.
In 2009, AB 311 (Ma), as introduced, would have made the
valuation methodology and centralized provisions permanent and,
as amended, would have extended the effective date. However,
Governor Schwarzenegger vetoed the bill because one airline
disagreed with extending the valuation methodology, and the
timing of AB 964's sunset allowed another year for all the
parties to reach consensus. The Governor signed a similar bill
the following year (AB 384, Ma, 2010). AB 384 extended the lead
assessor model and the valuation methodology until 2015-16, but
differed from AB 311 by (1) replacing language specifying value
with a rebuttable presumption (previously, the
methodology-produced value was deemed to be the aircraft's fair
market value), (2) allowing the taxpayer to rebut the
presumption with appraisals, invoices, and expert testimony, and
(3) allowing aircraft to be valued lower than the APG guide
value by capping an aircraft's value at its original cost. The
maximum value cap provision was added to appease the airline
that opposed AB 311 in the prior year. In calculating total
fleet values, this provision requires the county to substitute
the original price paid when it is lower than wholesale price
less 10 percent for any individual aircraft in the fleet. This
reduces the total fleet value for any airline able to purchase
new planes at deeper discounts.
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In 2015, the Legislature enacted AB 1157 (Nazarian), which
extended the sunset date of the lead county methodology by one
year, through 2016-17. Thus, under current law absent
legislation, beginning in 2017-18 each county would once again
value certificated aircraft based on its fair market value
without statutory guidance.
Proposed Law: This bill would
extend 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
would make other changes to the process of valuing certificated
aircraft for property tax purposes, including the following:
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 and audit
processes.
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.
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
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assessor's office, and if the lead county assessor's office
is unable to provide an answer, may only then direct
questions to the commercial air carrier that filed the
property statement.
Related
Legislation: SB 1329 (Hertzberg), as amended April 26, 2016,
proposed to extend the commercial air carrier provisions, but
for five years rather than three years as this bill proposes.
This version of SB 1329 would have (1) added a new section of
law extending the valuation provisions (as opposed to extending
the preexisting law as this bill proposes), (2) eliminated the
10 percent reduction provided when wholesale APG values are
used, and (3) allowed trial de novo for commercial air carriers
in a refund lawsuit. However, the bill was amended on May 31st
to do nothing else but extend the current lead-county system for
one additional year. The May 31st version of the bill is
currently pending hearing in the Assembly Appropriations
Committee
Staff
Comments: This bill would maintain the status quo, as modified,
for one additional year. The resulting revenue would likely
differ from that derived from the methodology used prior to
1998, when valuation was left to each individual assessor.
However, the magnitude and direction of the difference are
unknown.
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