BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
AB 311 - Ma
Amended: May 4, 2009
Hearing: July 8, 2009 Fiscal: Yes
SUMMARY: Extends Assessment Practices for Commercial
Aircraft from December 31, 2010 to December 31,
2014
EXISTING LAW (California Constitution) provides that
all property is taxable unless explicitly exempted by the
Constitution or federal law, and imposes property tax on
all taxable real and personal property. The Constitution
provides that taxation of "real" property (structures
affixed to the ground, etc.) is limited to the 1975
valuation adjusted for new construction plus an annual
inflation factor of no more than 2%. When a change in
ownership takes place, real property is valued at full
market value as of the year the transaction takes place.
I. Fleet Value
Generally, assessors value business personal property
by multiplying the acquisition cost of the property by a
price index, an inflation trending factor based on the year
of acquisition, to estimate its "reproduction cost new," an
approximation of the cost to replace the property at
current market prices. The "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. The "reproduction cost
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new less depreciation" value becomes the taxable value of
the property for the fiscal year. Unlike real property,
assessors revalue personal property every year.
When assessors value "certificated" aircraft, defined
as aircraft operated by air carriers for passenger or
freight service, they estimate the value of the taxpayer's
fleet, which is all aircraft owned by the taxpayer by make
and model. Assessors may only value certificated aircraft
with "situs" in California. If a taxpayer owns an aircraft
that enters into revenue service in the state, then
assessors must value the entire fleet (such as all of
Singapore Airlines' Airbus A380s), then allocate a share of
the fleet value to California to reflect that fleet's
activity in California. The value is then multiplied by
the property tax rate of one per cent to determine the
amount of tax due.
Until 1998, state law did not proscribe a method for
assessors to determine value of any particular 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 (AB 964, Horton), set to expire
in the 2010-11 fiscal year, which provided :
1. That the aircraft value is based on the lesser of:
A historical cost basis, or
10 per cent off (for a fleet adjustment) on the
prices listed in the "Airliner Pricing Guide," which
according to its website
( http://www.airlinerpriceguide.com/aboutus.asp ),
"was established in 1985 to provide the industry
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with the most accurate and up-to-date aircraft and
engine values available. With values taken from
actual transactions, the APG provides our
subscribers with a powerful tool to support business
decisions in a rapidly changing aviation
environment." If the APG ceases to exist, the Board
of Equalization (BOE) shall determine the guide or
adjustment.
1. Distinguishes between passenger aircraft (main-line
jets or regional jets), and freighter aircraft
(production or converted) by applying different
valuation methods for each.
2. Provides formulas for assessors to reduce original
costs to account for economic obsolescence, which is
based on net revenue per seat mile, net load factor,
and yield. These formulas apply when economic
obsolescence exceeds 10%.
THIS BILL extends the valuation methodology enacted by
AB 964 from December 31, 2010 to December 31, 2014.
II. Lead County Status and Audits
AB 964 required the Aircraft Advisory Subcommittee of
the California Assessors' Association to designate a lead
county for each commercial air carrier operating in
multiple airports in the state. If designated by the
Aircraft Advisory Subcommittee of the California Assessors'
Association, the taxpayer files a property statement with
the lead county assessor, who then calculates the
unallocated fleet value, electronically distributes the
determined fleet value to each county with situs for that
fleet based on an allocation formula, and leads the audit
team.
Additionally, AB 964 required assessors to audit a
commercial air carrier once every four years.
THIS BILL extends the lead county status and audit
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provisions enacted by AB 964 from December 31, 2010 to
December 31, 2014.
III. Property Statements,
Taxpayers with any taxable personal property exceeding
$100,000 in value must file a property statement with
assessors, and assessors must send property statements to
taxpayers required by law to submit the statement. Any
person owning property with an aggregate cost of below
$100,000 must submit a signed property statement upon
request of the assessor
Instead of filing property statements with each
individual assessor, AB 964 allowed the carrier to file
with the lead county assessor one property statement with
specified contents, one schedule for all aircraft with
situs, and flight data segregated by airport location with
the lead county assessor.
THIS BILL extends the property statement provisions
enacted by AB 964 from December 31, 2010 to December 31,
2014.
FISCAL EFFECT:
According to BOE, because AB 311 extends a sunset on
current law, the measure has no revenue or cost impact.
COMMENTS:
A. Purpose of the Bill
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According to the Author, "AB 311 is needed to ensure
that administrative efficiencies created by AB 964 continue
for both the airlines and assessors. AB 964 created a fair
and equitable statewide valuation of certificated
aircrafts. The Centralized Fleet Calculation Program has
allowed assessors to carry out their mandated
responsibility to fairly assess taxable property in an
efficient manner."
B. Come Fly With Me
Assigning value to aircraft is inherently difficult.
While the California Constitution provides that all
property not specifically exempted by state or federal law
is taxable, the Commerce Clause and the Due Process Clause
of the United States Constitution grant protections to
interstate commerce from state and local taxation, so
assessors must tax aircraft, but only using a methodology
that specifically measures that aircraft's activity
California. Additionally, the value of aircraft can
fluctuate: economic recessions reduce airline revenue as
fewer people can afford passenger flights and producers
ship fewer goods, leading to reduced revenues, and
therefore lower values for aircraft. Also, airlines
compete both domestically and internationally, and have
filed for bankruptcy with some frequency in recent years,
so an individual carrier's market share can change quickly;
UPS and Fed Ex recently grabbed a larger share of the cargo
flight market when DHL exited.
Prior to 1998, state law did not provide much guidance
for assessors to value commercial aircraft; instead, they
were left to their own devices, although the allocation
formula that apportions value to the state based on the
aircraft's time in the state and its arrivals and
departures has lived in statute since the 1960s. Without
clear direction from the state, assessors and commercial
airlines frequently disagreed about valuations, resulting
in litigation, and eventually the settlement agreement
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enshrined by the Legislature in 1998. After that agreement
expired, assessors and airlines again met and haggled, this
time resulting in AB 964, which provided further detail for
assessors and taxpayers to rely upon. AB 964's provisions
sunset after next year, and assessors and some airlines
have brought forth AB 311 to extend these provisions,
thereby preserving d?tente in this particularly tricky
corner of the property tax world, and preventing the
uncertainty that plagued certificated aircraft assessment
in the past.
C. Want to Get Away?
The California Assessors' Association, comprised of
all 58 elected County Assessors, sponsor AB 311, stating
that the procedure for certificated aircraft assessment is
a model of public-private cooperation due to administrative
efficiencies, and reduced cumbersome and costly appeals,
therefore the Legislature should extend the 2006 agreement.
Several airlines concur, such as United Airlines, American
Airlines, and Alaska Airlines, stating that while extending
existing provisions are not perfect, the fair and equitable
valuation measure provides certainty in an uncertain world,
especially for an industry plagued by the current recession
and volatile fuel costs. A common theme from both groups
is given the contentious history of certificated aircraft
assessment, agreement between airlines and assessors should
be sufficient cause to extend the law.
However, not all airlines support AB 311. Southwest
Airlines opposes the measure, stating that the formula in
existing law has led to "precipitous and unexpected rises
in tax liability." Southwest states that because it only
flies one model of aircraft, they are susceptible to
volatility in tax due when APG values change. According to
Southwest, the APG value for 737-700 aircraft increased 23%
from the prior year, leading to a 29% increase in tax
liability. Instead of AB 311, Southwest asserts that the
Legislature should change the methodology to determine
value by using APG less 20% instead of the current 10%, or
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to extend the sunset by three years (as opposed to AB 311's
four year extension). The Assessors counter this claim by
stating that the APG price guide changes did not cause the
rise in Southwest Airlines' assessments, arguing that the
increase in liability results from Southwest procuring 36
new aircraft and adding additional flights in California in
2007, resulting in a larger apportionment of value to
California. In an acquisition-cost valuation system,
values for tax purposes will be higher for recently
acquired property, assuming that current prices for the
same item are higher than past ones, and more flights in
California necessitates allocating a larger share of the
aircraft's value to California.
D. Domestic or International?
In addition to equalizing the assessment practices in
California's 58 counties, the State Board of Equalization
values the property of "statewide assessees," industries
with property in more than one county, such as utilities
and railroads. Similar to personal property such as
certficated aircraft, and unlike locally-assessed real
property, BOE revalues statewide assessee property every
year. BOE allocates the property tax revenue to each
county where the taxpayer has situs.
The Legislature has previously considered assigning
certificated aircraft assessment from county assessors to
the BOE, essentially treating certificated aircraft, which
operates in several counties, like utility and railroad
property. Many other states centrally assess certificated
aircraft. In 2003, the Committee approved AB 593
(Ackerman), although the measure was subsequently held in
the Senate Appropriations Committee. Proponents argued
that statewide assessment would reduce administrative
burdens for the airlines, which at the time had to file
property statements and appeal valuations individually with
each county assessor for each county in which it operates.
Assessors countered that BOE lacked the expertise to value
certificated aircraft, and would still be responsible for
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valuing real property and fixtures, thereby minimizing any
administrative efficiencies in tax administration.
Airlines sought centralized assessment with the BOE during
negotiations over AB 964, only to agree to the lead county
model in negotiations. Currently, 10 counties serves as
lead counties, with Los Angeles leading the assessment for
7 out of 11 fractional aircraft companies, and 17 out of 49
airlines.
The Committee's analysis of AB 593 also raised another
concern: that BOE often sides with taxpayers instead of
with assessors, and given the revenue impacts of
certificated aircraft assessment, the BOE should not be
granted the power to assess aircraft on behalf of the
counties. The analysis stated:
"The Board of Equalization in recent years has shown
itself to be remarkably friendly to business
taxpayers. Time after time, business tax appeals,
unitary property assessments and regulatory projects
have been decided by the Board in favor of business
taxpayers, despite contrary advice from legal and
administrative staff. Indeed, taxpayers can preempt an
unfavorable Board vote by forcing selected Board
members to recuse themselves from a decision, by
making strategic contributions to those members. There
is good reason to believe that if the responsibility
for assessing aircraft is assigned to the Board of
Equalization, aircraft will be assessed and taxed
significantly less than currently."
E. Arrivals and Departures
In addition to centralized assessment, another point
of contention between assessors and airlines is whether to
value embedded software. Assessors may value storage media
and basic operational programs, defined as those
fundamental and necessary to a computer functioning;
however, "computer programs" are expressly exempt (the
statute, crafted in 1972, refers to punched cards, tapes,
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discs, or drums). In 1996, BOE implemented Property Tax
Rule 152, which interprets statute to include only the
ROM-based kernel software contained in a computer, and
allowed operating system software to be exempt from the
property tax. As a significant and growing portion of the
value of modern aircraft comprises computer systems and
software (fly-by-wire systems, navigation, etc.), assessors
were concerned during AB 964 negotiations that the BOE
theory used to reduce tax on computer systems will be
applied in the assessment of aircraft. However, the grand
bargain of AB 964 was to maintain local assessment of
certificated aircraft, but not to include embedded software
in valuation. AB 311 extends this agreement and opts not
to reopen embedded software or centralized assessment.
F. Flying Into the Sunset
AB 311 extends the provisions enacted by AB 964 from
December 31, 2010 to December 31, 2014. The measure
initially proposed extending the sunset to December 31,
2015, despite Southwest Airlines desire for a December 31,
2013 repeal date. In a Solomonesque decision, the Assembly
Revenue and Taxation Committee reduced the term of the
extension by one year to the December 31, 2014 date.
The Legislature need not act this year to ensure
certainty for assessors and airlines alike; a measure
enacted next year effective January 1, 2011 would suffice.
While legislative approval earlier is better than later,
what's the rush to extend provisions not repealed for
another year? The Committee may wish to consider the
merits of extending these provisions of the law this year
instead of next; however, if the Legislature does not
extend the sunset before it expires, state law will again
have no specific law that directs assessors on certificated
aircraft valuation, and the state can likely expect a
recommencement of the appeals and litigation that plagued
the system before the settlement agreements.
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G. Not So Mandatory
One part of AB 964 requires an audit team of
auditor-appraisers from at least one but not more than
three counties to audit a commercial air carrier once every
four years. However, mandatory audit requirements are a
relic from a bygone era that do not have a place in today's
tax collection world. The Legislature enacted the current
mandatory audit requirement in a package of reforms in
response to the assessor scandals of the late 1950s and
1960s, where assessors were convicted of reducing
assessments in exchange for bribes (AB 180, Petris and
Knox, 1966). Today, county boards of supervisors and the
BOE more effectively monitor assessors that during the time
of the scandals. Voters also elect assessors, who are in
the best position to know which taxpayers may not be
adequately reporting personal property and business
fixtures, and whether an audit may uncover a taxpayer's
lack of compliance with the law. Mandatory audits
substitute the Legislature's judgment of whom an assessor
should audit, instead of the locally-elected property tax
expert who can best deploy audit resources in a
cost-effective manner. Additionally, state law no longer
specifies which taxpayers FTB should audit, removing such
direction for water's edge taxpayers in a measure the
Committee approved last year (SB 788, Cogdill, 2007). The
Committee may wish to consider deleting the mandate
directing assessors regarding who and when to audit in a
time of extreme fiscal stress, when local agencies struggle
to make ends meet given moribund revenues, higher costs and
caseloads, and costly state mandates.
Support and Opposition
Support:Board of Equalization; California Assessors
Association, United Airlines, Alaska Airlines, American
Airlines; San Mateo County Board of Supervisors;
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Oppose:Southwest Airlines
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Consultant: Colin Grinnell