BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 2688 HEARING: 7/3/12
AUTHOR: Committee on Revenue & TaxationFISCAL: Yes
VERSION: 6/26/12 TAX LEVY: Yes
CONSULTANT: Grinnell
PROPERTY AND SALES TAXES
Changes thresholds for property taxes on air taxis; alters
timing for filing an election for bad debt deductions or
refunds; provides consistency for transaction and use tax
rates
Background and Proposed Law
I. Property Taxes on Aircraft. Section One of Article
XIII of the California Constitution provides that all
property is taxable unless explicitly exempted by the
Constitution or federal law. When assessors value
aircraft, they must decide whether it's "certificated,"
meaning that the aircraft is operated by air carriers for
passenger or freight service. When a property owner owns a
certificated aircraft, assessors estimate the value of the
taxpayer's entire fleet, which is all aircraft owned by the
taxpayer by make and model. Assessors may only value
certificated aircraft with "situs," or physical location,
in California. If a taxpayer owns an aircraft that enters
into revenue service in the state, then assessors must
value the entire fleet, and 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 1% to determine the amount of tax due.
Until 1998, state law did not set forth 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
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30, Kopp). In 2003, the agreement expired. However, in
2006, assessors and the airlines again agreed on a new
valuation methodology (AB 964, Horton), which:
Valued aircraft based on the lesser of:
o A historical cost basis, or
o 10% off (for a fleet adjustment) on the
prices listed in the "Airliner Pricing Guide."
Distinguished between passenger aircraft (main-line
jets or regional jets), and freighter aircraft
(production or converted) by applying different
valuation methods for each.
Provided 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.
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
The Legislature extended the valuation methodology to the
2015-16 fiscal year (AB 384, Ma, 2010).
Air taxis are chartered aircraft available on demand. For
property tax purposes, air taxis are currently defined as
aircraft with less than 30 seats, and a maximum payload
capacity of 18,000 pounds, and hold a certificate from the
Federal Aviation Administration. Air taxis meeting this
definition are assessed as part of the lead assessor
methodology described above, instead of by assessors in
each county in which the air taxi is "habitually situated."
Assembly Bill 2688 increases the limit on seats to 60, and
the maximum payload capacity to 18,000 to reflect recent
changes made to the definition of air taxis in federal
regulations. The measure also requires air taxis to hold a
certificate of public convenience and necessity or other
economic authority from the U. S. Department of
AB 2688 - 6/26/12 -- Page 3
Transportation to qualify for the lead assessor
methodology, replacing the Federal Aviation Administration.
II. Bad Debt Deductions for Sales Taxes. If a retailer
sells a product, but later finds the sale to be worthless
due to nonpayment, the retailer can deduct the loss from
income taxes. Additionally, the retailer is relieved from
sales and use tax liability for the transaction due and
payable to the Board of Equalization (BOE). The retailer
must file an election with the BOE to receive a deduction
in the amount of the tax due on the bad debt from future
sales taxes due or claim a refund of previous taxes paid.
The Legislature allowed a lender, assignee, or affiliate of
the retailer to deduct the tax or claim a refund too, as
retailers often sell the debts to collections firms or
assign them to an affiliate to attempt to collect the debt
(AB 599, Lowenthal, 1999). The retailer, lender, or
affiliate must file an election with BOE to for the
deduction or the refund if:
The deduction hasn't been previously claimed or
allowed,
The accounts were found worthless and written off
by the lender,
The contract between the retailer and the lender
contains an irrevocable relinquishment of all rights
to the account from the retailer to the lender,
Last year, the Legislature removed the requirement that the
form be filed with BOE (AB 242, Committee on Revenue and
Taxation). Instead, the retailer and the lender retain the
election form in case of an audit. Prior to the change,
BOE allowed the retailer to file the election after the
claim for deduction or refund, at which time BOE considered
the claim valid.
Assembly Bill 2688 deletes the requirement that the
election be made prior to claiming the deduction or refund.
III. Transactions and Use Taxes. Existing state law
allows cities, counties and special districts to impose a
transactions and use tax in increments of 0.125% upon voter
approval. This tax is imposed in addition to the statewide
sales and use tax rate of 7.25%. AB 686 (Huffman, 2011)
changed the rate at which the transactions and use tax
could be imposed from 0.25% to 0.125% or multiple thereof.
While every other section of the Revenue & Taxation Code
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cite the 0.125%, two sections still state that the multiple
must be 0.25%.
Assembly Bill 2688 makes all the sections of the
transactions and use tax consistent and allow all taxes to
be imposed in multiples of 0.125%.
State Revenue Impact
BOE estimates negligible revenue losses.
Comments
1. Purpose of the bill . According to the California
Assessors Association, the air taxi part is necessary to
update state law to recent changes in federal regulation to
ensure the fair and accurate assessment of aircraft, and
that the aircraft hold the correct certification.
According to BOE, the purpose of the bad deduction part is
"The purpose of this revision is to address an unintended
consequence that has resulted in situations where the
lenders have failed to file properly completed election
forms when claiming the deduction or refund. In such
cases, the claim for deduction or refund is not considered
valid. Currently, staff allows the claimant to prepare and
file a proper election form after the claim for deduction
or refund is filed, but will not consider the claim valid
until such time as the election form is filed (see
Regulation 1642 (i)(5)(F), which interprets and explains
these provisions). Consequently, if an election form is not
filed by the lender within the general limitations period
for which a claim for refund or credit may be accepted as
timely under the law, the BOE is barred from accepting the
claim for deduction or refund for those periods that fall
outside the statute of limitations for filing refund claims
pursuant to Section 6902 (even if the claim itself was
filed within the limitations period). Consequently, staff
has disallowed otherwise valid claims for deductions or
refunds by lenders for periods beyond the limitations
period. This bill would delete the requirement that the
election form be prepared and retained prior to claiming a
deduction or refund. Therefore, the date of filing of a
proper election will have no affect on the date of filing
of the claim for a deduction or refund. Even where the
lender files a proper election form outside the limitations
AB 2688 - 6/26/12 -- Page 5
period, the timeliness of the claim will still be
determined by the date of filing of the claim itself."
According to BOE, the purpose of the transactions and use
tax component is "On August 4, 2011, Governor Brown
approved AB 686 (Huffman). AB 686 amended various sections
of the R&TC to decrease the rate at which a city or county
may levy, increase, or extend a TUT from 0.25% (or a
multiple thereof) to a rate of 0.125% (or a multiple
thereof). This BOE-sponsored housekeeping proposal would
change the rate in R&TC Sections 7261 and 7262 from 0.25%
to 0.125%, to conform to the changes made by AB 686
(Huffman). "
2. Duplicates . AB 2688's transaction and use provisions
are identical to AB 1126 (Calderon). Committee staff
recommends deleting them from this bill.
Assembly Actions
Assembly Revenue and Taxation Committee: 8-0
Assembly Appropriations Committee:17-0
Assembly Floor: 73-0
Support and Opposition (6/28/12)
Support : State Board of Equalization, California Assessors
Association.
Opposition : Unknown.