BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |SB 661 |Hearing |4/22/15 |
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|Author: |Hill |Tax Levy: |No |
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|Version: |4/13/15 |Fiscal: |Yes |
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|Consultant|Grinnell |
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PROPERTY TAXATION: STATE ASSESSMENT: COMERCIAL AIR CARRIER
PERSONAL PROPERTY
Transfers assessment of airline personal property from local
assessors to BOE.
Background and Existing Law
Section 1 of Article XIII of the California Constitution
provides that all property is taxable 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 each year.
I. Assessors and BOE. In 1850, the Legislature first directed
county assessors to tax property; however, assessors in
different counties often applied different tax rates and methods
of assessment. The California Constitution of 1879 created 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. The Constitution
additionally allows the Legislature to authorize BOE assessment
of property owned or used as "public utilities".
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II. Valuing certificated aircraft. Generally, assessors value
business personal property, such as aircraft, by multiplying the
taxpayer's cost of acquiring it by a price index that measures
inflation to estimate its "reproduction cost new," an
approximation of 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.
Assessors may only value certificated aircraft with "situs" in
California on a fleet basis, which is all aircraft owned by the
taxpayer by make and model. 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 A380s or 747s an airline 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.
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 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, and directed a "lead assessor" to value
each airline's fleet that sunset after the 2010-11 fiscal year
(AB 964, Horton). Instead of filing property statements with
each county, airlines file a single consolidated statement with
a single assessor designated by the Aircraft Advisory
Subcommittee of the California Assessors' Association. The
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measure established categories for mainline jets, regional
aircraft, production freighters, and converted freighters, 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 per cent off (for a fleet adjustment) on the
wholesale prices listed in the "Airliner Pricing Guide," If
the APG ceases to exist, the Board of Equalization (BOE)
shall determine the guide or adjustment.
AB 964 also directed assessors to analyze the cost to see if an
economic obsolescence allowance should apply. 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 applied a
different economic obsolescence formula similar to the above for
freighters, except it uses net revenue per available ton mile
(50%) and ton load (50%) factors instead.
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 from AB 311 by:
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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.
With AB 384's sunset approaching, certificated aircraft will
revert to local assessment without a lead assessor on January 1,
2016, requiring each assessor where a plane lands to
independently value aircraft. Instead of extending the lead
assessor model, the commercial airline industry wants BOE to
assess its personal property instead, including certificated
aircraft, due to the burden of complying with the lead assessor
model, and disagreements with assessors over the application of
the economic obsolescence factor.
Proposed Law
Senate Bill 661 transfers assessment of personal property owned
by commercial air carriers to BOE, including certificated
aircraft, commencing in 2017-18 fiscal year. The bill extends
the current lead assessor model one year to 2016-17. BOE must
use the same methodology to establish value currently used by
assessors. BOE allocates revenue from assessing this property
by situs. BOE must audit commercial air liners that have
assessable personal property with a value of four hundred
thousand dollars or more.
The measure codifies the representative period as the second
full week in January, which was previously designated by BOE in
consultation with assessors. The bill also makes conforming
changes striking out sections necessary to change from the lead
assessor model to BOE assessment.
State Revenue Impact
According to BOE, SB 661's revenue effect is unknown.
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Comments
1. Purpose of the bill . According to the author, "SB 661
creates a centralized process that will bring efficiencies and
uniformity compared to the current decentralized county
assessment process. The goal of SB 661 is to be revenue neutral
to counties from a tax assessment perspective, since the Board
of Equalization will use the same airline taxation formula in
current law that is utilized by county assessors. Article XIII,
Section 19 of the California Constitution requires the BOE to
assess property owned or used by regulated railroad companies.
It also requires the BOE to assess the property owned by certain
public utilities. These properties are commonly referred to as
"state assessed" properties because the BOE, rather than the
local county assessor, is responsible for determining the value
of the property for property tax purposes. However, counties
are responsible for billing, collecting, and apportioning the
resulting taxes. These functions are the responsibility of the
county auditor and the county tax collector. A state assesses
property holdings are valued as a single unit and the total
value is subsequently allocated among the counties. Generally,
state assessed properties operate as an integrated unit and
often cross county boundaries. Property owned or used by a
state assesse that is used in the company's primary operations
as part of the company's integrated system is assessed as
"unitary property" and the company is valued as a single unit
under the principal of unit valuation. A "unit valuation" of a
public utility company or a railroad company captures the value
of the company's property as a system of interrelated assets,
rather than a valuation of individual components of land,
buildings, and other assets. For these companies, value depends
on the interrelation and operation of the entire public utility
or entire railroad. For example, there would be little worth to
one section of railroad track or one section of an electrical
transmission line; rather their value depends on being a part of
an integrated system. There are currently 450 state assesses
and over the last three years about 35-40 appeals have been
filed with the BOE. Only two of these appeals have gone before
the board over the last three years and in both cases the BOE
ruled against the taxpayer."
2. Who assesses ? SB 661 asks legislators to decide whether
locally-elected county assessors or the State Board of
Equalization is better suited to establishing the correct value,
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especially because the bill maintains the same assessment
methodology that's been in place since 2006. Placing the duty
with either assessors or BOE will have tradeoffs, as each will
have distinct advantages over the other. Assessors argue that
they are better suited to value aircraft because they're
professional property appraisers who aren't subject to political
influence, have experience to establish correct values based on
their long experience doing so BOE lacks, and are subject to
rigorous BOE oversight. It's also easier for assessors to be
physically present at airports within their counties to track
takeoffs and landings. BOE argues that it has extensive
experience valuing utility properties, and as a result, only
rarely must consider appeals over values with taxpayers it
currently assesses. BOE additionally notes that SB 661 would
result in less litigation, conform to other states' practices,
achieve efficiencies, and increase uniformity.
3. Burden . The burden on the taxpayers to comply with the
current lead assessor model, not to mention local assessment,
would be reduced significantly under SB 661, as taxpayers would
only have to supply BOE with information they currently send to
the assessor in each county in which they do business.
Additionally, taxpayers would only have to appeal to BOE if they
disagreed with its appraisers' value, as opposed to county
assessment appeals boards, whose decisions aren't binding on
other counties. Taxpayers would only be subject to BOE audits,
as opposed to a mandatory audit from a lead county every four
years as required by current law, as well as more limited audits
from other counties. However, the measure would create a
significant precedent because BOE would solely assess airline
personal property, while assessors would value airline real
property, creating a unique treatment which could invite other
proposals to shift responsibility for assessment from the local
level to BOE. Another potential concern for SB 661 is that the
same body that administers the tax would also consider appeals;
when the Legislature first imposed the personal income tax, it
also created the Franchise Tax Board to administer the tax, but
assigned appeals to BOE due to this concern.
4. How to assess ? 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
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mergers, 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 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 kind
of safety valve that would reduce values due to obsolescence
whenever a weighted average of three metrics fell 10% below its
average for the past ten years. Some airlines appealed
assessors' valuations over different issues, including arguing
that assessors erred by using an incorrect period to calculate
the ten 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 challenging that determination, and to preserve
legal standing.
5. One of a kind . BOE is the nation's only elected tax appeals
board. As such, it has been criticized for its tax appeal
decisions being politicized and favorable to affluent taxpayers.
BOE allows taxpayers and their representatives to directly
lobby its members, which is generally barred in judicial or
quasi-judicial settings, creating the impression that effective
lobbying and political strategy is more influential than
applying the facts to the law in tax cases, and creating an
administrative record that could help guide taxpayers and tax
enforcement agencies. In a recent case, the Second District
Court of Appeals faulted BOE "for rendering a decision without
due regard for the statutory and constitutional laws that govern
its decision-making" City of Palmdale v. State Board of
Equalization, Case B232833. The Court held that, "To vacate the
judgment and reinstate [BOE's] decision would not only imply the
agency acted properly, it would also undermine the effectiveness
of the judgment in exposing [BOE's] deficiencies in handling the
administrative appeal." Due to a reduction in the number of
published decisions, the Legislature recently required
publication of BOE decisions in significant cases (AB 2323,
Perea, 2012). However, AB 2323 doesn't seem to have resulted in
further clarity. A December, 2014, BNA Bloomberg news article
that concluded the bill "had been a disappointment to some
practitioners and tax professionals hungry for more insight into
why the board makes the decisions it does." SB 661 proponents
counter that local assessment appeals boards can be biased
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towards counties that rely on property tax revenues from
assessing aircraft, and point to the lack of current disputes
between BOE and taxpayers it currently assesses.
6. Appeals . Either BOE or local assessment will each have
strengths and weakness, however, one important issue to consider
is standing for appeals. Under current law, taxpayers can only
appeal local assessment appeals board decisions to superior
court if they believe assessment are illegal; issues of pure
valuation must be resolved administratively. Additionally, even
if taxpayers win art one county assessment appeals board, its
decisions aren't binding on other counties. On the other hand,
under SB 661, taxpayers could challenge BOE valuations in
Superior Court, and name counties as defendants. Local agencies
would lack standing to challenge BOE aircraft assessments.
7. Constitutional ? Assessors argue that the Legislature can't
assign the duty to assess commercial airline personal property
because they aren't "public utilities." The author counters
with a Legislative Counsel opinion that disagrees, relying
mostly on Independent Energy Producers Association, Inc. v.
Board of Equalization (2004) 125 Cal.App.4th 425. In that case,
the Court ruled against energy generators who argued that the
Legislature's enactment of AB 81 (Migden) which was preceded by
BOE Rule 905, unconstitutionally required BOE to assess
electricity generation, as they weren't "public utilities."
Assessors had valued these power plants after investor-owned
utilities had sold them as a result of California's attempt to
deregulate them (AB 1890, Brulte, 1996.)
8. Embedded. In addition to BOE assessment, another point of
contention between assessors and airlines is whether to value
embedded software. Assessors may value storage media and basic
operational programs, defined as those fundamental and necessary
to a computer functioning; however, "computer programs" are
expressly exempt (the statute, crafted in 1972, refers to
punched cards, tapes, discs, or drums). In 1996, BOE
implemented Property Tax Rule 152, which interprets statute to
include only the ROM-based kernel software contained in a
computer, and allowed operating system software to be exempt
from the property tax. However, the grand bargains represented
in AB 964 and AB 384 was to maintain local assessment of
certificated aircraft, but not to include embedded software in
valuation. SB 611 transfers assessment to BOE, while remaining
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silent on embedded software.
9. Another way ? The Constitution does allow the Legislature to
authorize counties to create multi-county assessment appeals
boards. The Legislature could elect to do so to find a middle
ground between this bill and AB 1157 (Nazarian), which extends
the current lead assessor method. That measure is currently in
the Assembly Revenue and Taxation Committee.
Support and
Opposition 4/17/15
Support : Alaska Airlines, American Airlines, California Chamber
of Commerce, California Taxpayers Association, Delta Airlines,
State Board of Equalization, Southwest Airlines, United
Airlines.
Opposition : California State Association of Counties,
California Tax Reform Association, County of Santa Clara, Santa
Clara County Assessor Larry Stone, California Assessor's
Association
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