BILL ANALYSIS �
AB 2262
Page 1
Date of Hearing: April 21, 2014
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
AB 2262 (Frazier) - As Amended: April 1, 2014
2/3 vote. Fiscal Committee.
SUBJECT : Private railroad car tax
SUMMARY : Changes the method of calculating the property tax on
private railroad cars (PRRCs) by switching from calendar days to
miles traveled, and modifies the depreciation schedule as
specified. Specifically, this bill :
1)Provides that the Board of Equalization (BOE) shall determine
the physical presence, for interstate apportionment purposes,
of PRRCs upon the basis of mileage instead of calendar days.
2)Provides that the BOE shall value the cars based on the
owner's acquisition cost, including additions and betterments,
less depreciation.
3)Eliminates the additional depreciation provided to owners who
purchase used PRRCs by deleting the phrase "minus the age of
acquisition."
4)Deletes the definition of "class of private cars."
5)Deletes the provision exempting PRRCs from assessment for the
period of time the rail car is not qualified for revenue
service and is in a repair facility in California.
EXISTING LAW :
1)Imposes a property tax on PRRCs operating on railroads in
California. (Revenue and Taxation Code (R&TC) Section 11201-
11702.)
2)Provides that the BOE shall value the cars by class based on
the owner's acquisition cost, less depreciation. All car
classes are depreciated on a life schedule of either 22 years
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or 25 years, minus the age of acquisition. (R&TC Section
11292.)
3)Provides that, in making an assessment, the BOE shall
determine the average of each class of PRRCs physically
present in California on the basis of car days. (R&TC Section
11293.)
4)Provides that in assessing the physical presence of a car
class, the BOE shall exclude car days while the cars are not
qualified for revenue service and are in a repair facility in
this state requiring and undergoing or awaiting remodeling,
overhaul, renovation, conversion or require, which
necessitates total labor in excess of 10 man hours. Car days
excluded shall not exceed 90 days per car unless the claimant
provides substantiation of the necessity for the additional
days. (R&TC Section 11294.)
5)Defines "class of private railroad cars" as the Association of
American Railroad's one letter alpha component of its car type
codes as contained in Exhibit D in the Universal Machines
Language Equipment Register specification manual. (R&TC
Section 11206.)
FISCAL EFFECT : The BOE estimates an annual General Fund (GF)
revenue loss of between $1.16 million and $1.2 million.
COMMENTS :
1)The author states that "AB 2262 converts the way physical
presence is measured from the days spent in California to the
miles traveled. A mileage based system is less complex to
administer and conforms to the way other states that impose a
PPRC tax measure presence." Additionally, the author states
that the resulting system will be "less costly for the BOE to
administer and will reduce compliance costs for PRRC owners
railroads. Streamlining the administration of this tax allows
BOE to assign more senior staff to other duties."
2)Proponents argue, "AB 2262 will establish a simplified
procedure for assessing privately owned railroad cars that
conforms to the method used by all other states that measure
presence. Changing to a mileage-based system like those used
in other states will reduce costs and increase compliance for
both private railroad car owners and railroad companies."
AB 2262
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Additionally, supporters of this bill argue that "measuring
presence with a mileage-based system is less complex and less
costly to administer, which would allow the BOE to assign
staff to other duties. Accuracy would also be improved
because BOE staff will be able to request mileage data
directly, from railroad car owners and will not be forced to
rely on less accurate car day counts currently received by
railroad companies." Finally, supporters explain that
"switching to a mileage-based system avoids the approaching
necessity of replacing current software at an estimated cost
of $500,000. The existing program uses obsolete code language
that is no longer supported and thus increasingly difficult to
maintain."
3)Committee Staff Comments:
a) Background . In 1995, the Legislature enacted AB 1426
(Pringle), Statutes of 1995, Chapter 22, which imposed the
car class depreciation schedule set forth in R&TC Section
11292. AB 1426 was sponsored by BOE Member Dean Andal,
with the cooperation of car companies and BOE staff, to
develop a valuation method which reduced disputes, but in a
revenue neutral manner. Although the miles traveled were
considered in AB 1426, the valuation method was rejected
because of the revenue loss.
b) Administrative Savings . According to the author's
office, the car-day count software program is nearing the
end of its useful life, and switching to a mileage-based
system would avoid the cost of replacing the software
program. The BOE estimates a one-time cost of $500,000 for
replacing the day-counter software program. Additionally,
the BOE estimates that switching over to a mileage based
system would eliminate a $13,000 yearly subscription to
keep track of the number of days PRRCs are in California.
Finally, by utilizing miles traveled instead of calendar
days, California will be in conformity with the rest of
North America. This may make it easier for taxpayers to
comply with property tax laws.
c) Days vs. Mileage . The purpose of the property tax
system is to fairly assess the value of property divided
among different local jurisdictions. The proponents of
this bill have argued that switching from "car days" to
"mileage" traveled is a much better measure of the
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property's value because the economic benefit of a rail car
is derived from its movement of cargo from one location to
another. Under the current system, a PRRC can be taxed
while standing idle awaiting cargo. This argument assumes
that economic benefit is only gained while the rail car is
in motion. This assumption fails to acknowledge the
economic benefit that is received from the loading and
unloading of cargo.
By switching over to a miles traveled method of valuation,
this bill places all of the economic value on the distance
traveled. This may be an appropriate method of valuation
if most of the rail cars traveled through California in
order to reach their destination. However, California is
considered a "terminal state," meaning that rail cars are
frequently left idle waiting to load and unload cargo at a
port or at a manufacturing facility. This means that most
of the economic benefit is actually gained, at least in
California, not from traveling on rails but from the
loading of cargo. Switching to a miles traveled method of
valuation incorrectly assumes that all economic value
derives only from the movement or PRRCs. A more accurate
method of valuation would be to estimate how much value is
added at each stage of supply chain. This could involve a
hybrid system like the method used for valuing commercial
aircraft.
In recognizing the importance of loading and unloading
cargo, commercial aircrafts have adopted a hybrid system of
valuation. In general, the valuation system is split
between flight and ground time, and arrival and departures.
The flight and ground time factor is weighted 75%, and the
arrivals and departures factor is weighted 25%. This
hybrid method of valuation recognizes the importance of the
various stages of travel, and attempts to provide a more
accurate method of valuing property. A hybrid system of
valuation, however, may increase administrative
difficulties and decrease accuracy. Understanding that a
large portion of the economic value attributed to PRRCs
derive from the loading and unloading of cargo, especially
in a terminal state like California, the Committee may wish
to consider maintaining the existing calendar day
assessment method instead of switching to miles traveled.
d) Easing Administrative Burdens . This bill attempts to
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reduce administrative burden by disregarding car classes
when determining the presence of a PRRC. The car-day
program receives border crossing data and determines the
number of days each car was physically present in
California. The program then converts the data to an
equivalent number of cars, broken down by specific car
class, based on the American Association of Railroads Alpha
designation. R&TC Section 11292 currently has six
different categories for car classes. Limiting PRRC
valuation to two classes, either a 22- or 25-year
depreciation life, would significantly reduce
administrative difficulties. Although it may be more
accurate to value PRRCs based on car classes, the change
may be justified in terms of administrative ease, and ease
of compliance for the PRRC owners.
In addition to ignoring the car class in determining
valuation of PRRCs, this bill modifies the depreciation
schedule for used PRRCs and for improvements or betterments
made to PRRCs. Under current law, a purchaser of a used
PRRC receives the depreciation benefits of the car as of
the day the car was built. As an example, if a 10-year-old
car with the depreciation life of 22 years is sold, the
purchaser of the PRRC can continue with the depreciation
schedule from the previous owner. Current law also
provides for additional depreciation benefits for improving
PRRCs, specifically allowing an improvement to be
depreciated as if it were part of the car when first built.
As an example, if an owner adds a refrigeration system
worth $20,000 to his 11-year-old PRRC, and the PRRC has a
depreciation life of 22 years, the owner can immediately
depreciate $10,000.
The elimination of car classes for valuation purposes and
modifications to the depreciation schedule can, by itself,
reduce the amount of reporting from 500 lines of data to a
maximum of 38 lines of data. This would reduce data entry
and processing time for staff. Moreover, these changes can
be done independently of the change from calendar days to
miles traveled. This would reduce some of the
administrative burdens that proponents are favoring while
maintaining GF revenue.
e) Prior Legislation :
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i) AB 1186 (Karnette), of the 2007-08 Legislative
Session, would have required the BOE to exclude the dwell
time from the average number of days each class is
present in the state. AB 1186 was held in this
Committee.
ii) AB 478 (Takasugi), of the 1997-98 Legislative
Session, would have required the BOE to determine the
average number of PRRCs physically present in the state
based, in part, on mileage. AB 478 died on the Senate
floor.
iii) AB 1426 (Pringle), Statutes of 1995, Chapter 22,
imposed the current car class depreciation schedule and
deleted the car mileage as a valid method of measuring
presence.
REGISTERED SUPPORT / OPPOSITION :
Support
Board of Equalization (Sponsor)
Board of Equalization Member, George Runner
Railway Supply Institute
Opposition
None on file
Analysis Prepared by : Carlos Anguiano / REV. & TAX. / (916)
319-2098