BILL ANALYSIS �
Senate Appropriations Committee Fiscal Summary
Senator Kevin de Le�n, Chair
AB 777 (Muratsuchi) - Taxes: Exemption: Space Flight Property
Amended: February 19, 2014 Policy Vote: G&F 7-0
Urgency: Yes Mandate: Yes
Hearing Date: April 7, 2014
Consultant: Robert Ingenito
This bill meets the criteria for referral to the Suspense File.
Bill Summary: AB 777 would exempt qualified property for use in
space flight, as defined, from property tax.
Fiscal Impact: Currently, one county assessor is assessing tax
on space flight materials, and subsequent appeals and related
activity are pending. Consequently, under current law and
regulations, this bill is estimated to result in a reduction of
local property tax revenue of roughly $1 million annually. Under
Proposition 98, this reduction in local property tax revenues
would lead to an increase in state General Fund support for K-14
education of approximately 40 to 50 percent, or potentially
$500,000 annually. The exact amount would depend on the specific
factors which determine the annual Proposition 98 minimum
funding guarantee.
Background: The California Constitution, Article XIII, Section 1
states that all property is taxable unless otherwise exempted by
the Constitution or federal law. 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. However,
county assessors value personal property annually.
The Constitution specifically allows the Legislature to exempt
personal property from the property tax by two-thirds vote. In
1980, the Legislature exempted all business inventories from the
property tax, defined as items generally held for sale or lease
in the ordinary course of business.
The Board of Equalization (BOE) was created to ensure consistent
tax rates and assessment practices among county assessors.
Consistent with its oversight role, BOE enacts rules and
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regulations which generally bind county assessors; however,
assessors can disagree with BOE. Assessors believing that BOE's
interpretation is invalid, may bring a so-called "538 action"
against BOE in court for declaratory relief instead of applying
BOE's rule or regulation. Because BOE rules clarify current
law, they generally apply retroactively to any fiscal year
within the statute of limitations.
Space Exploration Technologies Corporation (SpaceX) constructs
rockets that deliver satellites into space as well as spacecraft
that carry cargo to the International Space Station. In 2012,
the Los Angeles County Assessor audited SpaceX, and noted space
flight property in a site visit that wasn't listed on the form
taxpayers use to self-report personal property to the Assessor.
In February 2013, Los Angeles County issued SpaceX an assessment
for that property for all years within the statute of
limitations, back to the 2007-08 fiscal year. SpaceX appealed
the assessment to the Los Angeles County Assessment Appeals
Board; the appeal hearing has not yet been scheduled.
In December 2013, BOE issued an advisory, non-binding opinion
concluding that SpaceX's equipment qualifies for the business
inventory property tax exemption. Additionally, in February
2014, BOE initiated a discussion of proposed revisions to Rule
133 to add specified space flight property to its list of items
explicitly defined as exempt business inventory.
Proposed Law: This bill would exempt from the property tax
tangible personal property that has space flight capacity.
Property exempted by the bill includes raw materials, works in
progress, finished goods, and includes orbital space facilities,
space propulsion systems, space vehicles, launch vehicles,
satellites, or space stations of any kind. Fuel sold and used
exclusively in space flight is also exempt if it is not
adaptable for use in ordinary motor vehicles. The property need
not be returned to Earth to qualify for the exemption.
The exemption applies to lien dates between January 1, 2014 and
January 1, 2024, and sunsets on July 1, 2025.
Staff Comments: As noted above, disagreement currently exists
regarding whether propulsion systems (rockets used for space
flight transportation) that are consumed as part of delivery are
either taxable business supplies or tax-exempt business
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inventories. Also as noted above, BOE has issued a legal opinion
concluding that space materials are business inventory and thus
exempt from property tax, and has begun the process to revise
the related rule toward the same end. Consequently, the
determination of the revenue impact resulting from this bill
could depend on the baseline revenue scenario selected to which
this measure compares. Using a methodology that assumes the BOE
pending rule change has already occurred, this measure would
have no revenue impact.