BILL ANALYSIS Ó
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Date of Hearing: June 20, 2016
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Sebastian Ridley-Thomas, Chair
SB
1329 (Hertzberg) - As Amended May 31, 2016
Majority vote. Fiscal committee.
SENATE VOTE: 37-1
SUBJECT: Property taxation: certificated aircraft
SUMMARY: Extends the Centralized Fleet Calculation Program for
statewide assessment of certificated aircraft for property tax
purposes for one year, until fiscal year (FY) 2017-18.
Specifically, this bill:
1)Extends, until FY 2017-18, the application of the current
assessment methodology for determining the fair market value
(FMV) of certificated aircraft owned by commercial air
carriers for property tax purposes and the rebuttable
presumption that the pre-allocated FMV of certificated
aircraft, as calculated, is correct.
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2)Extends, until December 31, 2017, the application of the
following provisions of law that otherwise are scheduled to
sunset on December 31, 2016:
a) Revenue and Taxation Code (R&TC) Section 441(m), which
requires a commercial air carrier to file one annual
property statement with a designated "lead" county, as
provided; and,
b) R&TC Section 1153.5, which establishes the procedure for
selecting a lead county to calculate an airline's fleet
value and a coordinated multi-county audit team to perform
mandatory audits of commercial air carriers.
3)Imposes a state-mandated local program and provides that, if
the Commission on State Mandates determines that this bill
contains costs mandated by the state, reimbursement for those
costs will be made as required by statute.
EXISTING LAW:
1)Provides that all property is taxable unless explicitly
exempted by the California Constitution or federal law.
Limits ad valorem taxes on real property to 1% of the full
cash value of that property as set forth in the California
Constitution.
2)Requires that real and personal property be taxed at the same
rate (Section 2 of Article XIII of the California
Constitution). Personal property, which generally is defined
as property other than real property, is subject to property
tax of 1% of the assessed value of the taxable personal
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property. The property tax applicable to personal property,
however, is calculated based on the market value of that
property, rather than its "full cash value."
3)Requires each county to impose an ad valorem property tax rate
of 1% of the assessed value of the taxable property located in
that county. Certificated aircraft are subject to property
taxation when in service in California. Typically,
certificated aircraft are commercial aircraft operated by air
carriers for passenger and freight service, while general
aircraft are typically privately owned aircraft. General
aircraft are assessed on an aircraft-by-aircraft basis and an
assessment is made only in a single county where the aircraft
is habitually situated. Certificated aircraft are valued for
purposes of property taxation under a "fleet" concept, which
means that the basis of the assessed value is not the value of
any single aircraft owned by an air carrier, but the value of
all aircraft of each particular fleet type flown into
California. Types are grouped by make and model. Only an
allocated portion of the entire fleet's value is ultimately
taxed to reflect actual presence in California's counties.
Because certificated aircraft are movable, they are often
located in more than one county during an assessment year, and
assessments are made for each county in which the aircraft in
the fleet land during the year.
4)Prescribes a centralized assessment methodology for valuing
certificated aircraft for FYs 2005-06 through 2016-17, with
the methodology repealed as of December 31, 2016. This
methodology allows a commercial air carrier to file a single,
consolidated property statement with a designated "lead"
county for all certificated aircraft with a tax situs in
California. The centralized assessment methodology is based
on a formula to be used by the "lead" county in determining
the preallocated fair market value of each make, model, and
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series of mainline jets, production freighters, converted
freighters, and regional aircraft with a tax situs within
California for property tax purposes. The preallocated value
is the lesser of:
a) A historical cost less depreciation basis with no
individual aircraft value exceeding the original price
paid; or,
b) The value referenced in the Winter edition of the
"Airline Price Guide," a commercially-prepared value guide
for aircraft, less 10%.
Once the "lead" county calculates the preallocated value of
the aircraft, the information is transmitted to all other
counties within which the airline has acquired a tax nexus.
Each individual county then determines its allocated portion
of the fleet based on the flight data for that particular
county. R&TC Section 1152 provides an allocation formula to
determine the frequency and the amount of time that an air
carrier's aircraft makes contact and maintains situs within a
county during a representative period. An allocation ratio is
the sum of two factors:
a) A ground and flight time factor, which accounts for 75%
of the ratio; and,
b) An arrivals-and-departures factor, which accounts for
25% of the ratio. [Property Tax Rule 202 (c)].
The sum of these factors yields the allocation ratio, which is
applied to the full cash value of a fleet of a particular type
of aircraft operated by an air carrier. The sum of the
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assessed allocated values for each make and model used by an
air carrier results in the total assessed value of the
aircraft for that air carrier for a particular county.
5)Requires the State Board of Equalization (BOE), upon
consultation with assessors, to designate for each assessment
year the representative period of an air carrier's ground and
flight time and arrival and departure activity used in the
allocation formula.
6)Specifies that, with respect to lien dates occurring on and
after January 1, 2011, the value of an individual aircraft
assessed to the original owner may not exceed its original
cost and that the pre-allocated fair market value of an
aircraft may be rebutted by certain evidence, including
appraisals, invoices, and expert testimony.
7)Requires the "lead" county to transmit the property statement
related to an airport location to the situs county, and
provides that each county is responsible for valuing personal
property and fixtures at its particular airport locations.
8)Requires assessors to audit once every four years the personal
property holdings of any property owner with an assessed value
of more than $400,000. (R&TC Section 469).
9)Allows an audit team comprised of staff from one to three
counties, as determined by the Aircraft Advisory Subcommittee
of the California Assessors' Association, to perform a
mandatory audit of a commercial air carrier once every four
years on a centralized basis. The work performed by the audit
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team is deemed to have been made on behalf of each county for
which a mandatory audit would otherwise be required under R&TC
Section 469. (R&TC Section 1153.5).
FISCAL EFFECT: According to the BOE, unknown costs, although
the status quo is maintained.
COMMENTS:
1)Author's Statement : The author has provided the following
statement in support of this bill:
This bill extends the sunset provisions contained in the
"Lead County System" by one year. Both the Senate and
Assembly, along with the airline industry and county
assessors, are seeking a long-term solution.
2)Arguments in Support : Proponents of this bill state that "the
airlines and the county assessors, along with legislative
staff have been involved in fruitful negotiations" and "are
cautiously optimistic a compromise can be reached that will
make the local assessment of aircraft better for the county
assessors and the airlines." This bill "is an important
element of these current negotiations."
3)Background : Prior to 1999, no specific assessment methodology
procedure for valuing certificated aircraft or the carrier's
possessory interest in the publicly owned airport existed in
California. In 1998, a group of counties and airline industry
representatives entered into a written settlement agreement to
dispose of outstanding litigation and appeals over the
valuation of possessory interest assessments in airports and
the valuation of certificated aircraft. The settlement
agreement created a new assessment methodology for valuing
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aircraft that applied to FY 1998-99 to FY 2002-03 and was
codified in a three-piece legislative package [AB 1807
(Takasugi), Chapter 86, Statutes of 1998; AB 2318 (Knox),
Chapter 85, Statutes of 1998; and SB 30 (Kopp), Chapter 87,
Statutes of 1998].
4)The 2005 Settlement Agreement : In 2005, the representatives
of the airline industry and a county assessors working group
jointly refined that valuation methodology, recognizing the
need to distinguish between different types of aircraft and to
detail the specific calculation of the variable components
that were previously lacking. For instance, with respect to
calculating the historical cost basis of the aircraft, each
variable component is specified and taken into account: (a)
acquisition cost, (b) price index, (c) percent good factor,
and (d) economic obsolescence. With respect to APG, a "blue
book" value guide for aircraft, the use of values referenced
in that guide is delineated, recognizing that airlines
generally receive a fleet discount that is not reflected in
prices listed in the guide. The 2005 revisions to the
valuation methodology of certificated aircraft were codified
by AB 964 (Horton), Chapter 699, Statutes of 2005. However,
AB 964 specified that the revised formula for determining the
FMV of certificated aircraft of a commercial air carrier
applied only for FYs 2005-06 through 2010-11. AB 964 also
included repeal dates for the provisions prescribing the
procedures for designating a lead county assessor's office for
each commercial air carrier operating certificated aircraft in
California, allowing a commercial air carrier to file one
property statement with the lead county, and permitting an
audit of those carriers on a centralized basis.
In 2010, AB 384 (Ma), Chapter 228, Statutes of 2010, extended
the valuation methodology and centralized assessment
provisions temporarily to FY 2015-16. AB 384 also revised the
valuation provisions to create a rebuttable presumption of
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correctness for the FMV of certificated aircraft determined
under the assessment methodology. AB 384 specified that the
FMV may be rebutted by evidence including appraisals,
invoices, and expert testimony. Finally, AB 384 provided that
the value of an individual aircraft assessed to the original
owner may not exceed its original cost from the manufacturer.
5)Centralized Assessment System : Under existing law, which this
bill proposes to extend, a "lead" county is designated by the
Aircraft Advisory Subcommittee of the California Assessors'
Association for each commercial air carrier operating
certificated aircraft in California. The "lead" county is
required to calculate an unallocated fleet value of the
carrier's certificated aircraft for each make, model, and
series, as provided. Once the fleet value is calculated, it
is transmitted to other counties, which in turn determine
their allocated portions of the fleet value based on the
flight data for each county. The allocation process limits
each county's assessment to reflect the aircraft's physical
presence in that county.
Existing law also allows commercial air carriers operating in
multiple California airports to file a single consolidated
property statement with a "lead" county. In turn, the "lead"
county must transmit return information related to
non-aircraft personal property and fixtures to other counties
where the air carrier operates. The audit procedures are also
centralized: an audit team directed by the "lead" county will
audit the air carrier once every four years on a centralized
basis.
6)Certainty and Predictability of the Existing Assessment
Methodology : Prior to 1998, the valuation of aircraft had
been contentious and challenging for both county assessors and
commercial air carriers, but the codified valuation
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methodology has reduced those conflicts.<1> The existing
centralized assessment of certificated aircraft provides
certainty and predictability for both assessors and airlines.
Further, the current procedure of designating a lead county
assessor's office to calculate the preallocated fleet value
ensures that airlines report the same information to every
county, resulting in a uniform statewide assessment. Absent a
codified methodology, there is no guarantee that the values
determined by each individual county assessor would be the
same since property appraisal is subjective and opinions of
value differ. Finally, the centralized assessment of aircraft
greatly reduces administrative costs for both parties. Unless
the existing methodology for valuing aircraft is extended,
both the assessors and airlines will have to deal with
multiple tax returns reporting the same information, multiple
audits and multiple county assessment appeals. Furthermore,
assessors would be able to use any valid method to determine
FMV, such as, for example, cost, income, comparable sales, and
published market value guides.
7)The Rebuttable Presumption of Value : The assessment of
certificated aircraft is a difficult and complex task. As
such, the potential for litigation and assessment appeals is
significant. It is presumed by both the assessor and taxpayer
that the existing methodology will result in a fair and
reasonable assessment. However, since appraisal is not an
exact science, there may be instances where one of the parties
believes, and has clear evidence, that the assessment
resulting from the prescribed methodology is wrong. In these
---------------------------
<1>
In 2013, several air carriers commenced legal action
challenging the calculations of economic obsolescence under R&TC
Section 401.17(a)(1)(C) and (D). The lawsuits have been
consolidated into one case pending in Orange County Superior
Court. This bill, however, does not propose to modify the
economic obsolescence provisions.
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instances, the issue is usually settled by an assessment
appeals board. Consistent with the existing law, this bill
would allow taxpayers and assessors to appeal a value
established by following a legally prescribed methodology.
The practical result of "rebuttably presumed" language is that
it clearly recognizes that an assessment appeals board has the
discretion to set a fair market value where the facts
presented clearly overcome the presumption of correctness in
any given methodology. If the existing centralized assessment
provisions are not extended, then the burden of proof
regarding the correctness of the assessment will shift to the
air carrier challenging the assessed value.
8)One More Year : Certificated aircraft valuation is complex and
contentious, and has given rise to litigation and appeals
challenging assessments. Although the statutory methodology
has narrowed the scope of issues, it has not eliminated
conflict. Last year, AB 1157 (Nazarian), Chapter 440,
Statutes of 2015, extended the current assessment methodology
for certificated aircraft, that was otherwise set to expire,
for one year in hopes that the airline industry and county
assessors could reach consensus on how the methodology could
be reformed during the interim. Although the parties have not
yet reached consensus, talks remain ongoing.
9)Related Legislation :
a) AB 2622 (Nazarian) would extend the sunset date for the
centralized assessment methodology for three years to FY
2019-2020, require the representative period used by
assessors in assessing the certificated aircraft to be a
week or group of weeks in both January and July, and makes
other administrative changes. AB 2622 is pending hearing
by the Senate Committee on Governance and Finance.
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b) AB 1157 (Nazarian), Chapter 440, Statutes of 2015,
extended the sunset date for the centralized assessment
methodology from FY 2015-16 to FY 2016-17.
c) SB 661 (Hill) would have transferred assessment
jurisdiction for commercial air carrier personal property,
including certificated aircraft, to the BOE. SB 661 was
held by the Senate Appropriations Committee and
subsequently amended for a different purpose.
REGISTERED SUPPORT / OPPOSITION:
Support
Airlines for America (Sponsor)
Alaska Airlines
American Airlines
Southwest Airlines
Opposition
None on file
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Analysis Prepared by:Irene Ho / REV. & TAX. / (916)
319-2098