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 ?