BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | AB 2622| |Office of Senate Floor Analyses | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- THIRD READING Bill No: AB 2622 Author: Nazarian (D), et al. Amended: 8/2/16 in Senate Vote: 21 SENATE GOVERNANCE & FIN. COMMITTEE: 7-0, 6/29/16 AYES: Hertzberg, Nguyen, Beall, Hernandez, Lara, Moorlach, Pavley SENATE APPROPRIATIONS COMMITTEE: 7-0, 8/11/16 AYES: Lara, Bates, Beall, Hill, McGuire, Mendoza, Nielsen ASSEMBLY FLOOR: 50-28, 6/1/16 - See last page for vote SUBJECT: Property taxation: certificated aircraft assessment SOURCE: Author DIGEST: This bill extends the lead county assessor methodology for valuing certificated aircraft, and enacts other changes to improve the administration of the lead assessor system. ANALYSIS: Existing law: 1)Provides that all property is taxable unless explicitly exempted by the Constitution or federal law. 2)Limits the maximum amount of any ad valorem tax on real AB 2622 Page 2 property at 1% of full cash value, and precludes reassessment unless the property is newly constructed or changes ownership; however, assessors value personal property, such as certificated aircraft, each year. 3)Allows assessors to value certificated aircraft with "situs" in California on a fleet basis, defined as all aircraft owned by the taxpayer by make and model. 4)Apportions value 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 the Board of Equalization (BOE) as the second full in week in January. 5)Creates a lead assessor methodology for valuing certificated aircraft, and sets forth a methodology to calculate aircraft value (AB 964, Horton, Chapter 699, Statutes of 2006). The methodology: a) Requires owners of certificated aircraft to file one signed property statement for the taxpayer's personal property with a single assessor, which the owner can file using the Standard Data Record (SDR) network. b) Allows owners to file one schedule for its certificated aircraft. c) Limits audits of certificated aircraft to one, led performed by a multi-county team. d) Establishes categories for mainline jets, regional aircraft, production freighters, and converted freighters, and sets forth a valuation methodology for each. i) States as a rebuttable presumption the aircraft value as the lesser of a historical cost basis, or 10% off (for a fleet adjustment) the wholesale price listed in the Airline Price Guide. ii) However, in no case may this value exceed the aircraft's original cost, and owners of certificated aircraft may rebut the presumption using appraisals, AB 2622 Page 3 invoices, and expert testimony (AB 384, Ma, Chapter 228, Statutes of 2010). e) Provides for an economic obsolescence adjustment, where assessors analyze the change in three variables to determine whether larger economic forces are diminishing the aircraft's value. f) Requires the California Assessors' Association to designate a lead assessor for each airline to calculate the unallocated value of the fleet, transmit that value to non-lead counties, receive the consolidated property statement, and lead the audit team. g) Sunsets after the 2016-17 fiscal year, after which certificated aircraft will revert to local assessment. This bill: 1)Extends the current provisions of the lead assessor methodology to value certificated aircraft for three years, through the 2019-2020 fiscal year. 2)Requires that the representative period designated by BOE to consist equally of a week or group of weeks in January, and a week or group of weeks in July. 3)Requires the Aircraft Advisory Subcommittee of the California Assessors' Association to designate two contacts in each lead assessor's office for each carrier to address reporting issues and issues with the SDR network. 4)Requires the lead assessor to transmit the consolidated property statement to each assessor in which the personal property of the commercial air carrier has acquired situs, but directs each non-lead assessor receiving the statement to first send questions about its contents to the lead assessor. If the lead assessor cannot provide an answer, the non-lead assessor may then question the carrier. 5)Makes a technical change. 6)States that reimbursement for any state mandated costs must be made pursuant to existing statute. AB 2622 Page 4 Background 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. In 2003, the agreement expired, and assessors again locally valued aircraft without specific guidance from the Revenue and Taxation Code. In 2006, assessors and the airlines again agreed on a new valuation methodology, which sunset in the 2010-11 fiscal year. Under the agreement, a "lead assessor" values each airline's fleet. Instead of filing property statements with each county, airlines may instead file a single consolidated statement with the lead assessor designated by the Aircraft Advisory Subcommittee of the California Assessors' Association. AB 964 (Horton, Chapter 699, Statutes of 2005) also directed the lead assessor to audit the airline every four years. After Governor Schwarzenegger vetoed the first bill that extended the sunset (AB 311, Ma, 2009), he signed a similar bill the next year, which extended the lead assessor model and the valuation methodology until the 2015-16 fiscal year, but differed from AB 311 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. 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, all AB 2622 Page 5 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 establish a very detailed methodology based on either an easily knowable cost basis or a well-known price index. However, that bill also created a safety valve that would reduce values due to obsolescence whenever a weighted average of three metrics fell 10% below its average for the past 10 years. Some airlines appealed assessors' valuations over different issues, including arguing that assessors erred by using an incorrect period to calculate the 10-year average, incorrect comparison information, and applied the incorrect base year. 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. FISCAL EFFECT: Appropriation: No Fiscal Com.:YesLocal: Yes According to the Senate Appropriations Committee: 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 that is attributable to the bill's impact on assessed values would, in turn, impact General Fund expenditures. BOE's costs to implement this bill will be minor and absorbable. SUPPORT: (Verified8/12/16) AB 2622 Page 6 Alameda County Board of Supervisors California Assessors' Association California Special Districts Association California State Association of Counties Delta Air Lines Los Angeles County Assessor Jeffrey Prang Los Angeles County Board of Supervisors Placer County Assessor Kristen Spears San Luis Obispo County Assessor Tom Bordanaro San Mateo County Assessor Mark Church Stanislaus County Assessor Don H. Gaekle OPPOSITION: (Verified8/12/16) None received ARGUMENTS IN SUPPORT: 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. AB 2622 Page 7 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." ASSEMBLY FLOOR: 50-28, 6/1/16 AYES: Achadjian, Alejo, Arambula, Atkins, Bloom, Bonilla, Bonta, Brown, Burke, Calderon, Campos, Chau, Chiu, Chu, Cooley, Cooper, Dababneh, Dodd, Eggman, Frazier, Cristina Garcia, Eduardo Garcia, Gipson, Gomez, Gonzalez, Gordon, Roger Hernández, Holden, Irwin, Jones-Sawyer, Levine, Lopez, Low, McCarty, Medina, Mullin, Nazarian, O'Donnell, Quirk, Ridley-Thomas, Rodriguez, Salas, Santiago, Mark Stone, Thurmond, Ting, Weber, Williams, Wood, Rendon NOES: Travis Allen, Baker, Bigelow, Brough, Chang, Chávez, Dahle, Beth Gaines, Gallagher, Gatto, Gray, Grove, Harper, Jones, Kim, Lackey, Linder, Maienschein, Mathis, Mayes, Melendez, Obernolte, Olsen, Patterson, Steinorth, Wagner, Waldron, Wilk NO VOTE RECORDED: Daly, Hadley Prepared by:Colin Grinnell / GOV. & F. / (916) 651-4119 8/15/16 20:22:26 **** END ****