BILL ANALYSIS Ó
SENATE COMMITTEE ON APPROPRIATIONS
Senator Ricardo Lara, Chair
2015 - 2016 Regular Session
SB 1329 (Hertzberg) - Property taxation: certificated aircraft
-----------------------------------------------------------------
| |
| |
| |
-----------------------------------------------------------------
|--------------------------------+--------------------------------|
| | |
|Version: April 26, 2016 |Policy Vote: GOV. & F. 5 - 0, |
| | JUD. 4 - 2 |
| | |
|--------------------------------+--------------------------------|
| | |
|Urgency: No |Mandate: Yes |
| | |
|--------------------------------+--------------------------------|
| | |
|Hearing Date: May 16, 2016 |Consultant: Robert Ingenito |
| | |
-----------------------------------------------------------------
This bill may meet the criteria for referral to the Suspense
File.
Bill
Summary: SB 1329 would (1) extend for five years the existing
methodology for valuing certificated aircraft, excluding a 10
percent fleet reduction discount, and (2) permit trial de novo
for suits for refunds of locally-assessed property taxes on
certificated aircraft.
Fiscal Impact: The aggregate fiscal impact of this bill is
unknown and subject to considerable uncertainty. First, the
bill's removal of the 10 percent fleet reduction discount would
increase revenue by an unknown amount, up to several million
dollars annually. Next, the bill's extension of "trial de novo"
provisions to property tax refund litigation involving
certificated aircraft could lead to court-determined property
tax reductions of an unknown amount that potentially exceed the
aforementioned revenue increase. Changes in local property tax
SB 1329 (Hertzberg) Page 1 of
?
revenues, in turn, affect General Fund Proposition 98 spending
by up to roughly 50 percent (the exact amount depends on the
specific amount of the annual Proposition 98 guarantee, which in
turns depends upon a variety of economic, demographic and
budgetary factors. Ultimately, the bill could result in an
increase or a decrease in annual General Fund spending through
2021-22 relative to current law (See Staff Comments).
Finally, the Board of Equalization (BOE) would incur minor and
absorbable costs related to updating publications and its
internet site, and possible witness subpoenas or amicus briefs
related to litigation over valuation issues as a result of the
bill.
Background: All property, real and personal, is subject to property tax,
unless a specific constitutional or statutory exemption applies.
The Constitution limits the maximum amount of any ad valorem tax
on real property at 1 percent of full cash value, and precludes
reassessment unless the property is newly constructed or changes
ownership; in contrast, county assessors value personal
property, such as certificated aircraft, annually. The
Legislature first directed county assessors in 1850 to tax
property; however, assessors in different counties often applied
different tax rates and methods of assessment. The
inconsistencies were especially acute between counties dominated
by mining and agriculture. As a response, the California
Constitution of 1879 created BOE to equalize property tax rates
and assessment practices among counties. In 1910, voters amended
the Constitution to direct BOE to tax certain property that
crossed county lines, including that owned by railways, firms
selling gas and electricity, or telephone companies. The taxes
were exclusively levied for state purposes on a gross receipts
taxation basis. In 1933, the constitution was amended again and
the 'in lieu" gross receipts taxation on public utilities was
substituted with the ad valorem assessment by BOE that was
allocated to the local jurisdictions according to situs.
Valuing Certificated Aircraft. Generally, assessors value
business personal property, such as aircraft, by multiplying the
taxpayer's cost of acquiring it by an inflation adjustment to
estimate 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,
SB 1329 (Hertzberg) Page 2 of
?
which becomes the taxable value of the property for the fiscal
year.
Certificated aircraft used by air carriers is subject to
property tax when in revenue service in the State. Assessors may
only value certificated aircraft (defined as aircraft operated
by a domestic or foreign air carrier engaged in passenger or
fleet service) with "situs" in California on a fleet basis. This
means that the assessed value basis is not the value of any
single aircraft owned by an air carrier, but rather the value of
all aircraft of each type that is flown into the State. Aircraft
regularly fly in and out of California and the various
California counties with major airports; typically no single or
particular aircraft remains located in the State on a permanent
basis. Under the "fleet" concept, aircraft types that have
gained situs in California by their entry into revenue service
in this state are valued as a fleet, while only an allocated
portion of the entire fleet's value is ultimately taxed to
reflect actual presence in California's counties. For example,
assessors must value an airlines' entire A380 fleet if only one
enters the State, but doesn't value any of its 747's if none of
them do so, regardless of the total number or value of A380s or
747s the airline owns. Once assessors calculate value, they
must apportion it among counties based on a weighted average of
(1) the fleet's ground and flight time (75 percent), and (2)
arrivals and departures (25 percent) measured only during the
"representative period," currently designated by BOE as one full
week in January, with the selected week varying. This
apportioned fleet value is then multiplied by the appropriate
rate for the tax rate area in that county.
Prior to January 1, 1999, California law did not specify an
assessment methodology for valuing certificated aircraft, or for
valuing the carrier's taxable possessory interest in the
publicly owned airport in which the aircraft operated. In
1997-98, a group of counties and air carrier industry
representatives met to resolve property tax issues associated
with air carrier-owned and -used property. The end result was a
written settlement agreement to dispose of outstanding
litigation and appeals over the valuation of airport possessory
interest assessments and certificated aircraft. The Legislature
codified the settlement agreement in a three-piece package:
SB 1329 (Hertzberg) Page 3 of
?
Aircraft Valuation Methodology and Monetary Settlement.
AB 1807 (Takasugi, Chapter 86, Statutes of 1998) outlined
the valuation procedures for certificated aircraft until
2003 and provided $50 million in tax credits against future
tax liabilities, as well as extensive uncodified
legislative findings and declarations.
Airport Possessory Interests. AB 2318 (Knox, Chapter 85,
Statutes of 1998) specified the assessment methodology for
valuing the air carrier's taxable possessory interest in
publicly-owned airports.
Tax Credits. SB 30 (Kopp, Chapter 87, Statutes of 1998)
added general purpose provisions to allow counties and
taxpayers to enter into written settlement agreements
granting taxpayers tax credits.
In 2003, the agreement expired, and assessors again locally
valued aircraft without specific guidance from state law. In
2006, assessors and the airlines again agreed on a new valuation
methodology (AB 964, Horton, Chapter 699, Statutes of 2005), and
directed a "lead assessor" to value each airline's fleet.
Instead of filing property statements with each county, airlines
filed a single consolidated statement with a single assessor
designated by the Aircraft Advisory Subcommittee of the
California Assessors' Association, which rotates generally every
three years. AB 964 established categories for various types of
aircraft (passenger aircraft and freighter aircraft), 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
SB 1329 (Hertzberg) Page 4 of
?
sale/leaseback or assignment of purchase rights, or
aircraft acquired in bankruptcy, with specified
adjustments, or
10 percent off (for a fleet adjustment) on the wholesale
prices listed in the "Airliner Pricing Guide," If the APG
ceases to exist, BOE determines the guide or adjustment.
AB 964 also included an adjustment factor 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. Next, the
assessor applies a weighted average of the indicated percentage
adjustments: net revenue per available seat mile (35 percent),
net load (35 percent), and yield (30 percent). The assessor must
reduce the original cost by the percentage, but only if the
final economic obsolescence exceeds 10 percent.
In 2009, AB 311 (Ma), as introduced, would have made the
valuation methodology and centralized provisions permanent and,
as amended, would have extended the effective date. However,
Governor Schwarzenegger vetoed the bill because one airline
disagreed with extending the valuation methodology, and the
timing of AB 964's sunset allowed another year for all the
parties to reach consensus. The Governor signed a similar bill
the following year (AB 384, Ma, 2010). AB 384 extended the lead
assessor model and the valuation methodology until 2015-16, but
differed from AB 311 by (1) replacing language specifying value
with a rebuttable presumption (previously, the
methodology-produced value was deemed to be the aircraft's fair
market value), (2) allowing the taxpayer to rebut the
presumption with appraisals, invoices, and expert testimony, and
SB 1329 (Hertzberg) Page 5 of
?
(3) allowing aircraft to be valued lower than the APG guide
value by capping an aircraft's value at its original cost. The
maximum value cap provision was added to appease the airline
that opposed AB 311 in the prior year. In calculating total
fleet values, this provision requires the county to substitute
the original price paid when it is lower than wholesale price
less 10 percent for any individual aircraft in the fleet. This
reduces the total fleet value for any airline able to purchase
new planes at deeper discounts.
In 2015, the Legislature enacted AB 1157 (Nazarian), which
extended the sunset date of the lead county methodology by one
year, through 2016-17. Thus, under current law absent
legislation, beginning in 2017-18 each county would once again
value certificated aircraft based on its fair market value
without statutory guidance.
Trial De Novo. Under current law, in a refund action for
locally assessed property taxes, where the issue is a question
of law, the taxpayer has a right to a trial de novo; the court
is able to receive and consider new evidence. However, where the
issue is a question of fact, the court is restricted to a review
of the assessment appeals board findings and decisions (i.e.,
the administrative record). With respect to factual issues, the
superior court's level of review is limited to determining
whether "substantial evidence" in the record exists to support
the appeals board's decision.
Thus, taxpayers seeking to appeal an assessor's valuation of
locally-assessed property generally contact the assessor
initially informally to request a reconsideration of the value.
If this avenue proves unsuccessful, taxpayers begin the formal
appeal process (which can include a claim for refund) with the
county's board of equalization (i.e., the assessment appeals
board). For taxes on locally-assessed property, the Constitution
places the appellate authority for locally-assessed property
taxes with the county board of equalization, and requires this
appeals board to equalize the value of all property by adjusting
individual assessments. Seventeen county boards of supervisors,
primarily smaller counties, hear appeals directly, sitting as
the county board of equalization, while all other county boards
SB 1329 (Hertzberg) Page 6 of
?
of supervisors 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 when there is a dispute.
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 by board of supervisor members without professional
experience.
Taxpayers who continue to disagree with the assessment appeal
board's value after the appellate process 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
functions as trial courts.
In contrast, current law provides state assessees with a right
to a trial de novo in a suit for the refund of state-assessed
property taxes. In these refund actions, the trial court is not
restricted to a "substantial evidence" review of the
administrative record, but is required to consider all
admissible evidence relating to the valuation of the subject
property. This law requires the trial court to base its decision
on the "preponderance of the evidence" before it. In the case of
local-assessee refund actions, the courts are required to give
these cases special precedence. However, in the case of
state-assessee actions seeking a refund of property taxes,
courts are not required to 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.
SB 1329 (Hertzberg) Page 7 of
?
Proposed Law:
This bill would extend for five fiscal years (through 2021-22)
the commercial air carrier administrative provisions (the
extension of the lead county methodology), otherwise set to
expire, with one exception: the removal of the provision that
allows a 10 percent fleet discount from the Airliner Price Guide
and a related adjustment for aircraft that is less than two
years old. Additionally, the bill would extend the current state
assessee "trial de novo" provisions to a suit for the refund of
locally assessed property taxes exclusively for commercial air
carriers. Specifically, the trial court "may not be restricted
to the administrative record, but shall consider all the
evidence relating to the valuation of the property admissible
under the rules of evidence. The court shall base its decision
upon the preponderance of the evidence." The bill would repeal
these trial de novo provisions on January 1, 2022, consistent
with the sunset of the aircraft assessment valuation methodology
and the lead county system. These airline-related suits would
not be given precedence in the court scheduling.
Related Legislation: Among other things, AB 2622 (Nazarian) also
proposes to extend the sunset date for the certificated aircraft
assessment methodology and lead county system. That bill extends
the provisions for three more fiscal years. The bill is
currently in the Assembly Appropriations Committee.
Staff Comments: BOE indicates that in 2015-16, counties reported
certificated aircraft valuation totaling $8.0 billion. Thus, at
the basic one percent property tax rate, local property tax
revenues were $80 million. The bill's removal of the 10 percent
fleet discount reduction would lead to an increase in assessed
valuation, and in turn, an increase in property tax revenue. The
magnitude of the increase, however, is unknown. The reason for
this is, to the extent that airlines exert monoposy power when
purchasing aircraft from manufacturers such as Boeing, it is
possible that they could negotiate a price below "the wholesale
price listed in the Airliner Price Guide less 10 percent". In
other words, they may make their purchases at a price such they
cannot take the full 10 percent discount that the bill proposes
to remove. Thus, the upper bound of the annual increase in
property tax revenue would be $8 million.
SB 1329 (Hertzberg) Page 8 of
?
The bill's extension of "trial de novo" provisions to property
tax refund litigation involving certificated aircraft would have
an unknown impact on aircraft assessments and resulting property
tax revenue. Because under trial de novo, the court shall
consider "all evidence," it is possible that the court would
determine an assessed value higher than what was determined by
the local assessor. More likely, however, the court could
determine assessed value to be lower than that calculated by an
assessor. Thus, the specific revenue impact of the bill's
proposed provisions relative to current practice (the lead
county system) cannot be determined.
However, under the rules of this Committee, the bill's revenue
impacts must be scored relative to current law, not current
practice. As was discussed previously, the lead county system
under current law is scheduled to sunset at the end of 2016-17.
Consequently, the Committee must compare the estimated revenue
impacts of the bill vis-à-vis what certificated aircraft
assessments and resulting property tax collections would be if
the lead county system expired and assessors instead resumed
valuing certificated aircraft based on its fair market value
without statutory guidance. Because total property tax revenue
under that regime is unknown, estimating the revenue impact of
this bill cannot be done with any degree of certainty.
Likewise, because of the linkage between local property taxes
and General Fund Proposition 98 spending, the impact of this
bill on state spending is unknown.
-- END --
SB 1329 (Hertzberg) Page 9 of
?