BILL ANALYSIS Ó SENATE COMMITTEE ON GOVERNANCE AND FINANCE Senator Robert M. Hertzberg, Chair 2015 - 2016 Regular ------------------------------------------------------------------ |Bill No: |SB 1329 |Hearing |4/13/16 | | | |Date: | | |----------+---------------------------------+-----------+---------| |Author: |Hertzberg |Tax Levy: |No | |----------+---------------------------------+-----------+---------| |Version: |3/28/16 |Fiscal: |Yes | ------------------------------------------------------------------ ----------------------------------------------------------------- |Consultant|Grinnell | |: | | ----------------------------------------------------------------- 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 SB 1329 (Hertzberg) 3/28/16 Page 2 of ? 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, SB 1329 (Hertzberg) 3/28/16 Page 3 of ? 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 SB 1329 (Hertzberg) 3/28/16 Page 4 of ? 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 SB 1329 (Hertzberg) 3/28/16 Page 5 of ? 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. SB 1329 (Hertzberg) 3/28/16 Page 6 of ? 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. SB 1329 (Hertzberg) 3/28/16 Page 7 of ? 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, SB 1329 (Hertzberg) 3/28/16 Page 8 of ? 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 SB 1329 (Hertzberg) 3/28/16 Page 9 of ? 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 -- SB 1329 (Hertzberg) 3/28/16 Page 10 of ?