BILL ANALYSIS                                                                                                                                                                                                    Ó



          SENATE COMMITTEE ON GOVERNANCE AND FINANCE
                         Senator Robert M. Hertzberg, Chair
                                2015 - 2016  Regular 

                              
          
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          |Bill No:  |SB 1329                          |Hearing    |4/13/16  |
          |          |                                 |Date:      |         |
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          |Author:   |Hertzberg                        |Tax Levy:  |No       |
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          |Version:  |3/28/16                          |Fiscal:    |Yes      |
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          |Consultant|Grinnell                                              |
          |:         |                                                      |
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                       Property taxation:  certificated aircraft



          Extends the methodology for valuing certificated aircraft;  
          allows trial de novo for suits for refunds of locally-assessed  
          property taxes on certificated aircraft.  


           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 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  







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          property that crosses county lines.  The Constitution  
          additionally allows the Legislature to authorize BOE assessment  
          of property owned or used as "public utilities."

          I.  Valuing Certificated Aircraft.  Defined as aircraft operated  
          by a domestic or foreign air carrier engaged in passenger or  
          freight service, assessors may only value certificated aircraft  
          with situs in California on a fleet basis, defined as all  
          aircraft owned by the taxpayer 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,  








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          San Bernardino, San Diego, San Mateo, and Santa Clara) assess  
          the aircraft of each airline, and lead the appropriate audit  
          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) on 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 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.

          Last year, the Legislature enacted AB 1157 (Nazarian), which  








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          extended the sunset by one year to the 2016-17 fiscal year.   
          However, the lead assessor methodology will sunset for the  
          2017-18 fiscal year unless the Legislature extends it, in which  
          case assessors will again value certificated aircraft based on  
          its fair market value without specific guidance from state law.

          II. Trial De Novo.  Taxpayers seeking to appeal an assessor's  
          valuation of locally-assessed property generally contact the  
          assessor to request a change in value, but if unsuccessful, can  
          file an appeal (which can include a claim for refund) with the  
          county.  For taxes on locally-assessed property, the  
          Constitution places the appellate authority for locally-assessed  
          property taxes with county boards of supervisors sitting as the  
          county board of equalization, and requires the board to equalize  
          the value of all property by adjusting individual assessments.   
          Some county boards hear appeals directly, while others create  
          one or more assessment appeals boards to perform the  
          quasi-judicial role to hold a hearing to determine value of the  
          taxpayer's property.  Assessment appeals board members must  
          complete a training program, and possess five years'  
          professional experience in California as a certified public  
          accountant or public accountant, licensed real estate broker,  
          attorney, or property appraiser.  However, in smaller counties,  
          someone "possessed of competent knowledge of property appraisal  
          and taxation," can be appointed without professional experience.  
           Instead of assessment appeals boards, other counties appoint  
          hearing officers, who hold less formal hearings to review  
          evidence presented by both the assessor and the taxpayer.  In  
          some counties, a hearing officer's decision can final, while in  
          others, the office recommends a value, which the taxpayers can  
          dispute in a proceeding before the board.  

          Should the taxpayer continue to disagree with the county's value  
          after the appellate process, he or she can file suit in Superior  
          Court within six months of the board's final determination;  
          however, for suits that aren't posing a question of law, the  
          court can only review the existing administrative record to  
          determine whether substantial evidence supports the appeals  
          board's decision, and cannot substitute its own independent  
          judgment.  In these cases, the trial court generally acts as the  
          appellate court, and only grants review for "arbitrariness,  
          abuse of discretion, or failure to follow the standards  
          prescribed by the Legislature," as they see the county  
          assessment appeals process as performing the same fact-finding  








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          functions as trial courts.   

          Unlike local assessment, state-assessed taxpayers can appeal BOE  
          valuations to superior court for trial de novo (SB 2601,  
          Garamendi, 1988).  Courts must consider all evidence relating  
          the valuation of the property admissible under the rules of  
          evidence, and base its decision of the preponderance of the  
          evidence before it.  Just like almost all other actions seeking  
          a refund of property taxes, courts must give precedence to these  
          actions over all other civil actions in the matter of setting  
          for hearing or trial, unless special precedence is granted by  
          another section of law.  The airline industry wants to allow  
          superior courts to consider valuations of certificated aircraft  
          derived under the lead-assessor model. 



           Proposed Law

           Senate Bill 1329 extends the current lead assessor system for  
          valuing certificated aircraft, including the valuation  
          methodology, and the ability of an owner of certificated  
          aircraft to file a single property statement with a lead  
          assessor, among others, to an unspecified date.  The measure  
          also provides that the court must consider suits for the refund  
          of locally assessed property taxes on certificated aircraft de  
          novo. It does this by adding these valuations into the statute  
          that currently applies only to state assessments conducted by  
          BOE.  Where a taxpayer challenges a lead assessor's valuation of  
          certificated aircraft, the court would not be restricted to the  
          administrative record, but would consider all evidence relating  
          to the valuation under the rules of evidence, and base its  
          decision upon the preponderance of the evidence.  The bill's  
          trial de novo authorization sunsets after an unspecified date,  
          at which time the law reverts to its current state.


           State Revenue Impact

           BOE states that SB 1329's revenue impact from extending the  
          existing methodology for valuing certificated aircraft is  
          unknown, and indeterminable for its trial de novo provisions.










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           Comments

           1.   Purpose of the bill  .  According to the author, "The  
          locally-assessed property tax is the only one in California  
          where the assessor as prosecutor can be the same as the  
          assessment appeals board sitting in judgment.  This process is  
          fundamentally unfair to taxpayers, which is why it is so rare  
          both in California and in other states.  While I have authored  
          legislation in the past that would have offered trial de novo  
          for all local assessments, SB 1329 only affords this treatment  
          for aircraft, because the airlines face fundamentally more  
          complex assessments than almost all other locally-assessed  
          property: aircraft is both extremely valuable and travels every  
          day from jurisdiction to jurisdiction, and can have its value  
          drastically changed by larger forces, like economic recessions  
          and terrorist attacks.  Allowing a court to review new evidence  
          only ensures additional review that assessments are fair and  
          correct, and would only be brought in truly justified  
          circumstances given the cost of litigation.  SB 1329 would allow  
          appeals of aircraft assessment to be treated in the same way as  
          state-assessed utilities, whose property is more like airlines'  
          than land, improvements, and buildings that make up most of an  
          assessor's workload."         

          2.   Can it be done  ?  Legal experts dispute whether the  
          Legislature can constitutionally delegate to trial courts the  
          quasi-judicial fact finding authority the Constitution currently  
          places with county boards of equalization, as SB 1329 would for  
          locally-assessed certificated aircraft.  A Legislative Counsel  
          Enrolled Bill Report from 1988 on SB 2601, and Legislative  
          Counsel Opinion #14821 from 2001 argue that such a delegation is  
          unconstitutional, stating that case law precludes the  
          Legislature from enacting a statute that usurps the  
          constitutionally-based fact finding authority of an  
          administrative body.  Counsel states that this same reasoning  
          applies to any bill that would allow a trial court to consider  
          evidence outside the county board of equalization's  
          administrative record.  However, other legal experts have a more  
          positive view of legislative power, instead arguing that the  
          Legislature can enact statutes directing courts to consider new  
          facts because the Constitution contains no specific language  
          prohibiting it from doing so, and add that the Constitution  
          explicitly allows the Legislature to provide a manner for  
          taxpayers to maintain an action to recover taxes paid illegally.  








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           These experts also point out that a trial court affirmed SB  
          2601 in 1989, for which the Third District Court of Appeals  
          rejected a writ of mandate the year after, despite the  
          Legislative Counsel guidance.  

          3.   Should it be done  ?  Since the Assembly Revenue and Taxation  
          Committee' 1966 report, tax experts have often recommended trial  
          de novo for local property taxes in various forms, arguing that  
          a judicial process will determine more accurate values than  
          assessment appeals boards.  These experts argue that assessment  
          appeals boards or county boards of supervisors sitting as the  
          county board of equalization can have an interest in the revenue  
          consequences of appeals,  can be too deferential to assessors,  
          or lack the experience and expertise necessary to set  
          appropriate value, especially for more complex property.   
          However, counties argue that assessment appeals board are  
          independent and impartial, and fairly value properties according  
          to the law.  Counties add that allowing courts to consider new  
          evidence when determining value would significantly increase  
          workloads and costs, especially for those without the legal  
          resources necessary to compete in court with sophisticated  
          taxpayers like airlines.  Additionally, trial de novo already  
          exists for state assessed property taxes, and for other state  
          taxpayers when BOE decides against their appeal (but not for the  
          state when BOE sides with the taxpayer).  SB 1329 would set a  
          precedent in locally-assessed taxes for certificated aircraft,  
          which other taxpayers with complex valuation issues may want  
          themselves should the measure be enacted.  However, certificated  
          aircraft is already unique, as it is currently the only form of  
          personal property with its own, distinct valuation methodology  
          set in state law, and is distinct from other locally-assessed  
          property because it travels between jurisdictions.  On the other  
          hand, it's difficult to identify the specific issues in which  
          assessment appeals boards may have treated airlines unfairly,  
          other than the ongoing economic obsolescence litigation  
          discussed below, raising the question whether changing a  
          long-standing process without specific instances of unjust  
          treatment is justified.  The Committee may wish to consider the  
          merits of trial de novo for taxes generally, and for  
          locally-assessed certificated aircraft specifically.  

          4.   Valuation  .  Assessment of personal property, especially  
          certificated aircraft, is inherently difficult.  Not only are  
          planes valuable, which leads to a larger range of disagreement,  








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          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, and 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, SB 1329 proposes to extend the current  
          methodology, but doesn't specify for how long.  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.  

          5.   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  
          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.  While SB 1329 would  
          allow for trial de novo for these assessments, airline taxpayers  








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          would still have to file suits in each county where their  
          aircraft has situs due to this constitutional requirement.  The  
          Committee may wish to consider the Constitution's location  
          requirements when crafting an appellate process for lead  
          assessor valuations of certificated aircraft.

          6.   Double-referral  .  The Senate Rules Committee has ordered  
          that should the Committee approve a Do Pass motion for SB 1329,  
          that the measure be returned to Rules Committee for it to  
          consider a request from the Judiciary Committee to hear the  
          bill.  

          7.   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, Asm. Nazarian introduced AB 2622, which extends the  
          current valuation methodology until the 2019-2020 fiscal year,  
          and implements several procedural changes to the lead county  
          assessment process.  That measure is currently awaiting hearing  
          in the Assembly Revenue and Taxation Committee.        


          Support and  
          Opposition   (4/7/16)


           Support  :  Airlines for America; Alaska Airlines, American  
          Airlines, California Taxpayers Association; Southwest Airlines,  
          United Airlines.


           Opposition  :  California Assessors' Association, California State  
          Association of Counties.



                                      -- END --









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