BILL ANALYSIS Ó SB 803 Page 1 Date of Hearing: July 13, 2015 ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Philip Ting, Chair SB 803 (Committee on Governance and Finance) - As Amended June 29, 2015 Majority vote. Fiscal committee. SENATE VOTE: 36-0 SUBJECT: Property taxation. SUMMARY: Makes technical, noncontroversial changes to property tax law to improve property tax administration and respond to recent litigation. Specifically, this bill: 1)Eliminates the existing methodology for assessing the possessory interest for property owned and leased by the SB 803 Page 2 California State Teachers' Retirement System (CALSTRS), and instead directs assessors to value possessory interest in accordance with regulations adopted by the Board of Equalization (BOE) for the valuation of taxable possessory interest. 2)Adds the pro rata interest in resident-owned floating home marinas and mobile home parks to the list of legal entity changes eligible for the parent-child transfer. 3)Provides that a request for assessment made four years following the date the property was acquired by eminent domain or purchase, or the date of judgment of inverse condemnation become final, shall apply commencing with the lien date of assessment year in which the request is made. There shall be no refund or cancellation of taxes prior to the date that the request is made. The assessor shall adjust the base year value of the replacement property acquired in accordance with this section and make adjustments for inflation and any subsequent new construction occurring with respect to the subject real property. 4)Extends the sunset for the codified assessment valuation methodology used by assessors to value intercounty pipeline rights-of-way until January 1, 2021. 5)Deletes existing penalties and collections provisions for unpaid taxes on intercounty pipeline rights-of-way and instead provides that taxes unpaid on the default date shall be transferred to the unsecured roll along with any penalty and costs. 6)Corrects cross-references related to the assessment of property under the Williamson Act. SB 803 Page 3 7)Extends change of ownership filing requirements and penalties to owners of floating homes. 8)Requires an assessor to publish, on or before November 1 of each year, a notice specifying the dates on when the taxes on the secured role will be due, the times when these taxes will be delinquent, the penalties and costs for delinquency, that all taxes may be paid when the first installment is due, and the times and places at which payment of taxes may be made. 9)Specifies that a defense based on the alleged invalidity or irregularity of any proceeding can be maintained only in a proceeding commenced within one year after the date of execution of the tax collector's deed or within one year of the date the board of supervisors determines that a tax deed sold should not be rescinded, whichever is later. 10)Provides that no reimbursement is required by this act for certain costs that may be incurred by a local agency or school district because, in that regard, this act creates a new crime or infraction, eliminates a crime or infraction, or changes the penalty for a crime or infraction, or changes the definition of a crime. However, if the Commission on State Mandates determines that this act contains other costs mandated by the state, reimbursement to local agencies and school districts for those costs shall be made. 11)Provides that no appropriation is made by this act and the state shall not reimburse any local agency for any property tax revenues lost by it pursuant to this act. EXISTING LAW: SB 803 Page 4 1)Excludes from change of ownership reassessment real property transferred from parents to children upon timely filing a claim, but the exemption usually doesn't apply for changes in legal entities, like corporations or partnerships, except for transfers in legal entities that own any of the below properties. In these cases, the pro rata share of the legal interest in the project that a parent transfers to a child isn't reassessed: a) Exempts from reassessment parent-child transfers in legal entities for cooperative housing. (Revenue and Taxation Code (R&TC) Section 63.1.) b) Allows tenants to purchase mobile home parks (R&TC Section 62.1) and floating home marinas (R&TC Section 62.5) without reassessment, and additionally allows any other exclusion to apply. 2)Allows taxpayers who have property taken or purchased by a public agency to transfer their base-year values to a replacement property, starting with the first month after the taxpayer purchases the replacement property. Taxpayers must request the transfer within four years as part of the implementing statute, but BOE rules require the taxpayer to identify the replacement property as part of the request for the transfer, and direct the taxpayer to make a timely filed request for the assessor to grant the transfer. 3)Provides that all property is taxable unless explicitly exempted by the Constitution or federal law. 4)Imposes the possessory interest tax on independent, durable, SB 803 Page 5 and exclusive real property interests located on publicly-owned land. Establishes a specific methodology for valuing the possessory interests of tenants in buildings owned by the California State Teachers' Retirement System (CALSTRS), valuing each tenant's possessory interest tax by calculating each tenant's share of the building on a square footage basis, multiplied that share by the building's full cash value, and then applying the appropriate rate. BOE is allowed to enact rules, regulations, and other advice for assessors, including regarding the valuation of possessory interests. 5)Allows counties to choose between several methodologies for assessors to value land enrolled in the California Land Conservation Act, known as the Williamson Act. Under the "percentage of base year value" method, directs assessors to multiply the factored base year value of the property by a percentage to determine its assessed value, with the percentage differing based on the kind of land: 70% for prime agricultural land, as defined in Government Code (GC) Section 16142(a), 80% for prime commercial rangeland, and 90% for non-prime agricultural land in GC Section 16142(b). 6)Requires the tax collector to publish a notice, with specified information regarding the payment of taxes "on or before the date taxes are payable." 7)Requires persons challenging tax sales in court to do so within one year of the date of the execution of the tax collector's deed. Additionally, a person challenging the sale is required to first petition the board of supervisors to rescind the sale within one year before going to court, and reset the time restriction for a challenge to one year after the date the board rejects the rescission petition. A defense can only be maintained for one year after the execution date of the deed as part of the tax sale. SB 803 Page 6 8)Directs assessors to value intercounty pipeline rights-of-way according to a codified assessment valuation methodology. A value based on the density classification of the pipeline on a per-mile basis is rebuttably presumed to be correct. unpaid taxes on intercounty pipeline rights-of-way are on the secured roll, and thereby subject to the same penalties and collections provisions for all real property taxes. The intercounty pipeline rights-of-way methodology sunset on January 1, 2016. FISCAL EFFECT: The BOE estimates no revenue impact. COMMENTS: 1)Possessory interests in CALSTS properties : The California Constitution provides that all property is taxable unless explicitly exempted by the Constitution or federal law. The possessory interest tax is imposed on real property interests located on public land that are independent, durable, and exclusive, all terms defined by statute and case law. Basically, private interests on federal land, such as a vacation cabin on Forest Service land, are subject to the possessory interest tax, because the taxpayer "possesses" interests in the property despite not owning it. As a public agency, the CALSTRS does not pay property taxes so its tenants, such as coffee shops and restaurants. pay the possessory interest tax instead. In 1992, the Legislature created a different methodology for valuing possessory interests on tenants in buildings owned by CALSTRS (SB 1687, Greene). The assessor determined each tenant's possessory interest tax by calculating each tenant's share of the building on a square footage basis, multiplied that share by SB 803 Page 7 the building's full cash value, and then applied the appropriate rate. Recently, a taxpayer challenged the method of calculation and the Court found the method of calculation to be unconstitutional. (CALSTRS v. County of Los Angeles, 2013, B225245.) The Court reasoned that the possessory interest tax applies to the lessee's right to possess the real property for a specified period, but does not account for CALSTRS's reversionary interest, or its right to possess the property at a future date, thereby imposing a tax that exceeds the taxpayer's full market value of the possessory interest. Additionally, the court stated that to base the tenant's share of the tax based on the building's full cash value amounted to taxing exempt property owned by a public agency. This bill eliminates the assessment methodology the Court found unconstitutional, and instead directs assessors to value possessory interests in CALSTRS in accordance with BOE regulations. Unfortunately, as currently drafted, this bill may provide an unconstitutional delegation of legislative authority. In order to prevent such a delegation, the Committee may wish to specify the specific regulation which provides the method of valuation. 2)Code Maintenance : Real property transferred from parents to children is generally excluded from change of ownership reassessment upon timely filing a claim, but the exemption usually does not apply for changes in legal entities, such as corporations or partnerships. One specific exception is for parent-child transfers in legal entities in resident-owned floating home marinas and mobile home parks, as well as cooperative housing, where the pro rata share of the legal interest in the project that a parent transfers to a child is not reassessed. While existing law allows for parent-child transfers in legal entities for cooperative housing, mobile home parks and floating home marinas are not explicitly listed. The exclusion is allowed by more general language in the code sections that allow tenants to purchase mobile home parks and floating home marinas without reassessment. This bill explicitly adds to the list of legal entity changes SB 803 Page 8 eligible for the parent-child transfer in under R&TC Section 63.1, the pro rata ownership interest in resident-owned floating home marinas and mobile home parks. Additionally, this bill extends change of ownership filing requirements and penalties to owners of floating homes. 3)Eminent domain base-year value transfers : Another exclusion from change of ownership reassessment exists for base-year value transfers for taxpayers who have property taken or purchased by a public agency. A taxpayer who has property purchased or taken by a public agency in an eminent domain, or inverse condemnation proceeding, can transfer the original property's base-year value and apply it to a new property, starting with the first month after the taxpayer purchases the replacement property. When the voters enacted this exclusion in the California Constitution with Proposition 3 in 1982, the Legislature required affected taxpayers to request the transfer within four years as part of the implementing statute. BOE's rule also requires the taxpayer to identify the replacement property as part of the request for the transfer, and that the taxpayer must make a timely filed request. Recently, in Olive Lane Industrial Park, LLC v. County of San Diego (2014, D063337), the Court ruled that denying the transfer based on missing the filing deadline conflicted with the Constitution's exclusion. The Court ruled that a taxpayer who had property taken by eminent domain and purchased replacement property within four years of the date of the taking and did not file the claim until five- and one-half years after that date is entitled to apply the transfer after filing the request. The Court reasoned that the constitutional exclusion does not contain any deadlines, the Legislature has allowed taxpayers to obtain relief when taxpayers file request for other constitutional property tax exclusions filed after the deadline, and the deadline undermines the purpose of the constitutional exclusion. In response to the Court's decision, this bill requires the transfer be applied on the lien date of the assessment year in which the taxpayer files the request if the taxpayer filed the SB 803 Page 9 request after the four-year deadline. However, this bill precludes cancellations of taxes or refunds for taxpayers who do not file the request before the four-year deadline, which assessors can grant to taxpayers who file the request before the deadline. As currently drafted, a homeowner who purchases a replacement property two months after the original property was taken and waits an additional four years to file a request for reassessment is barred from receiving a refund or cancellation of taxes prior to the date that the request is made. Late requests for assessments may occur for several reasons but many individuals may simply not be made aware or understand that their replacement properties are eligible for a base-year value transfer. As such, this bill provides a serious penalty for property owners who request a reassessment years after purchasing a replacement property. As a way of mitigating the financial penalty, the Committee may wish to apply a four-year, look-back period from the date the filing for reassessment is made. 4)Intercounty pipeline rights-of-way : Assessors value intercounty pipeline rights-of-way according to a codified assessment valuation methodology, which reflected an agreement between assessors and intercounty pipeline right-of-way owners after litigation transferred the assessment duty from BOE to assessors in 1993 in Southern Pacific Pipe Lines, Inc. v. State Board of Equalization, (14 Cal.App.4th 42). Before the case, BOE assessed the pipelines, necessary operational equipment, land, and rights-of-way, but the Court held that assessors must value the land and rights-of-way because the Constitution only directs the BOE to assess pipelines. Essentially, assessors determine value based on the density classification of the pipeline on a per-mile basis, and that value is rebuttably presumed to be correct. The Legislature extended the methodology twice, and is currently set to expire on January 1, 2016. This bill extends the methodology five SB 803 Page 10 years until January 1, 2021. Additionally, current law provides that any unpaid taxes on intercounty pipeline rights-of-way are subject to the same penalties and collections provisions for all property taxes. This bill deletes that language and instead provides that taxes unpaid on the default date, plus penalties and costs, shall be transferred to the unsecured roll because rights of way cannot be treated like real property for collection purposes. The change would treat these rights-of-way similar to BOE assessed unitary property and oil and gas rights. 5)Cross Reference : Currently, counties can choose between several methodologies for assessors to value land enrolled in the California Land Conservation Act, known as the Williamson Act. One method, the "percentage of base year value," directs the assessor to multiply the factored base year value of the property by a percentage to determine its assessed value, with the percentage differing based on the kind of land: 70% for prime agricultural land, 80% for prime commercial rangeland, and 90% for other kinds of land. However, the code section that sets reimbursement amounts does not appropriately refer to these land types because the Legislature changed the references when it enacted SB 649 (Costa), Chapter 1019, Statutes of 1999, relating to farmland security zones. This bill updates the cross-references. 6)Property Tax Payment Date : Information technology has allowed tax collector's offices to publish tax information electronically instead of using paper methods. However, some statutes have not been updated, leading to inefficiencies. Specifically, R&TC Section 2609 provides that the tax collector must publish a notice, with specified information regarding the payment of taxes "on or before the date taxes are payable." However, counties now post these notices on the Internet, instead of the tax collector, often without SB 803 Page 11 coordinating with tax collectors. Some tax collectors have interpreted this section to mean that they are unable accept payments taxpayers remit until the county Web site administrator posts the notice. This bill replaces the phrase "before the date taxes are payable" with "November 1st," the first day taxes are due and payable, to ensure tax collectors can accept payments starting on November 1st. 7)Maintenance of Defense in Tax Sales : Existing law requires persons challenging tax sales in court to do so within one year of the date of the execution of the tax collector's deed. In 2011, the Legislature amended the section to additionally require the person to first petition the board of supervisors to rescind the sale within one year before going to court, and reset the time restriction for a challenge to one year after the date the board rejects the rescission petition. However, existing law provides that a defense can only be maintained for one year after the execution date of the deed, and does not take into account subsequent changes. This bill allows the defense to be maintained for challenges initiated one year after the board's rejection of the rescission petition REGISTERED SUPPORT / OPPOSITION: Support None on file Opposition None on file SB 803 Page 12 Analysis Prepared by:Carlos Anguiano / REV. & TAX. / (916) 319-2098