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California’s Second District Court of Appeal recently decided two cases affecting the personal property tax treatment of aircraft utilized in Part 135 on-demand operations. In a major victory for air taxi operators and the owners who make their aircraft available for charter flights, the Court of Appeal held that a county tax assessor cannot include “hypothetical” sales tax that had never been paid in determining the assessed value of aircraft for property tax purposes.1 However, the appellate panel also concluded that a county assessment formula for an aircraft taxed in two different states was not unconstitutional even though it produced a combined valuation of more than 105 percent of the aircraft’s value.2
1. Auerbach v. Los Angeles County Assessment Appeals Board No. 2 (CKE Associates, Real Party in Interest), 2008 Daily Journal Daily Appellate Report 16453 (referred to herein as the “CKE Decision”).
2. Auerbach v. Los Angeles County Assessment Appeals Board No. 2 (TWC Aviation, Inc., et al., Real Parties in Interest), 2008 Daily Journal Daily Appellate Report 16460 (referred to herein as the “TWC Decision”).
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Marvin Murray of the Aerlex Law Group represented Van Nuys-based air carrier TWC Aviation, Inc. (“TWC”) and the owners of three aircraft operated by TWC in the cases and he successfully argued TWC’s position before both the Los Angeles County Assessment Appeals Board (the “Assessment Appeals Board”) and the Los Angeles County Superior Court. Even though Los Angeles County Assessor Rick Auerbach (the “Assessor”) had lost twice to Mr. Murray at both the administrative and trial court levels, the Assessor still chose to appeal the superior court judge’s rulings to the Second District Court of Appeal and Mr. Murray also represented TWC in briefings and oral argument before the appellate panel.
The Second District Court of Appeal is the intermediate appeals court in California just beneath the state’s Supreme Court. Because the Second District encompasses Los Angeles County, the Second District’s decisions are often given great weight, especially when those decisions are certified for publication because published opinions establish judicial precedent on which courts may rely in the future. Only about seven percent of all California appellate decisions are certified for publication. The cases that Marvin Murray of the Aerlex Law Group participated in were both certified for partial publication.
TWC operated three different business jet aircraft, a Gulfstream G-IV, Astra/Gulfstream G100 and Cessna Citation X, on behalf of owner/lessors. TWC was fighting two separate policies of the Assessor that could have cost many thousands of dollars in additional personal property taxes. The two policies were:
(1) The Valuation Policy. In assessing the value of the aircraft that TWC utilized in its charter operations, the Assessor began including an amount equal to 8.25% of the aircraft purchase price in 2004 on the theory that upon resale the new owners might be liable for California sales/use tax if their use of the airplanes did not qualify for the common carrier exemption from sales/use tax. The problem, however, was these aircraft already had been found to be exempt from California sales/use tax and so the Assessor was charging personal property tax based upon a valuation that included thousands of dollars in sales tax the owners were exempt from and had never paid. This was what Aerlex referred to as “hypothetical” sales tax.
(2) The Apportionment Policy. Three of the aircraft that TWC utilized in its charter operations were subject to property tax assessments in both Los Angeles County, California, and Clark County, Nevada. The apportionment formula that the Assessor applied, when combined with the system utilized in Clark County, resulted in tax assessments being levied on TWC’s owners equal to 105% of the valuation of the aircraft – in other words, the owners were being taxed at a rate greater than the market value of the aircraft. TWC argued that this was unconstitutional because aircraft that were taxed in Los Angeles County only could not be assessed at a rate greater than 100% of their market value. In TWC’s view, the 5% disparity constituted an unconstitutional burden on interstate commerce.
A. The Valuation Argument and Decision.
When it issued its regular assessments on the three airplanes operated by TWC for fiscal year 2004, the Assessor did not include sales tax as an element of the assessed value of the aircraft. However, the Assessor later issued “escape assessments” on all three aircraft and these new, amended assessments did include a value equal to 8.25% of the purchase price of the aircraft as well as a 10% penalty due to non-payment of the property tax, notwithstanding the fact that the owners of those aircraft had been exempted from sales or use tax on the purchase of their aircraft. Each of the three aircraft had been used in TWC’s Part 135 on-demand air carrier operation more than 50% of the time as measured by flight hours in the first year after the aircraft were acquired and, therefore, each aircraft was exempt from sales and use tax under the common carrier exemption granted pursuant to California Revenue and Taxation Code § 6366(b) and California State Board of Equalization (“BOE”) Regulation 1593(c)(1)(B).
The hypothetical sales tax and 10% penalty together added more than $6.3 million to the assessed value of the three aircraft. TWC and the owners appealed the imposition of the hypothetical sales tax and on June 5, 2006, the Assessment Appeals Board ruled in favor of TWC, holding that the Assessor could not lawfully add hypothetical sales tax in calculating the assessed value of the aircraft because TWC and other air taxi operators using aircraft primarily in common carriage for hire were exempt from paying sales or use tax on such aircraft.
The Assessor petitioned the Los Angeles Superior Court to review the Assessment Appeals Board’s decision regarding the Valuation Policy, but following a hearing on June 4, 2007, Superior Court Judge David Yaffe denied the Assessor’s petition. The Assessor then appealed the case to the Second District Court of Appeal.
The Assessor argued, on appeal, that the question of whether hypothetical sales tax could be included as an element of an aircraft’s assessed value depended on whether the aircraft was involved in a scheduled or unscheduled operation. Airplanes used in unscheduled, on-demand operations, the Assessor argued, should be treated no differently than other general aviation aircraft. The Assessor asserted that the owners of the TWC aircraft were not actually in the air charter business, but were simply private aircraft owners leasing their aircraft to a Part 135 carrier in order to defray some of the costs associated with the operation and maintenance of the aircraft. For such owners, the Assessor contended, sales tax should be included as an element of value even if the owner had not paid the tax.
"...TWC argued that unscheduled air taxi operators constitute a separate 'trade level' from both general aviation and scheduled carriers..."
In its reply, TWC argued that the Assessor had misconstrued the different categories of air carriers. TWC pointed out that the BOE, the California state agency that both (i) establishes the personal
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Marvin W. Murray
property tax assessment policy and procedures that govern the conduct of county assessors statewide and (ii) rules on the validity of aircraft owners’ sales and use tax exemption applications, specifically recognizes and acknowledges the right of aircraft owners to claim exemption from sales tax when their aircraft is being utilized in on-demand air carrier operations. On that basis, TWC argued that aircraft used by unscheduled air taxi operators constitute a separate “trade level” from both general aviation and scheduled carriers and should not be subject to hypothetical sales tax.
The Second District Court of Appeal affirmed the trial court’s decision in the TWC case, thus preserving the victory of TWC and its aircraft owners. In the published opinion in the companion CKE Decision, the appeals court explained the basis for its ruling. The court noted that the definition of a common carrier as set forth in Title 18, California Code of Regulations § 1593(a)(2), “any person who engages in the business of transporting persons . . . for hire,” is broad enough to encompass unscheduled air taxi operations as well as large commercial airlines. The appellate panel also noted that the BOE has repeatedly acknowledged, in various publications and opinion letters, that Part 135 on-demand carriers (such as TWC) are common carriers with their own trade level and that sales tax should not be included in the valuation of their aircraft if sales tax was not paid on the purchase. The Second District said that the BOE’s policies and opinions, though not binding or dispositive on the court, were entitled to considerable deference. The court said the Assessment Appeals Board’s decision also had a reasonable foundation and was likewise entitled to judicial deference.
Although both TWC and CKE prevailed at the appellate level, there was one aspect of the Second District’s opinion that could be potentially troubling to owners whose aircraft are utilized in charter operations on an ongoing basis. The Assessor argued that, even if an aircraft had initially qualified for the common carrier sale tax exemption in the year of its purchase, its status for property tax purposes had to be reconsidered each year on the tax lien date (January 1). In other words, an aircraft that initially satisfied the 50%-plus test for common carrier flight hours might fall below that threshold in subsequent years even if it were still being operated by a charter company. The district court did not disagree with the Assessor’s argument, but said it was the Assessor and not the taxpayer who bore the burden of proof on this issue and concluded that the Assessor had failed to prove that the aircraft no longer qualified for the common carrier exemption.
B. The Apportionment Argument and Decision.
In analyzing the usage of the three TWC aircraft in Nevada, the Clark County Assessor had determined that the airplanes were used in that county 5.51% of the time. The Nevada calculation was based upon a formula that took several different elements into consideration, including a weighted ground time ratio as indicated by flight schedules, plane hours, originating and terminating tonnage and revenue from miles flown in Nevada. The Assessment Appeals Board found that the methodology Nevada had used in arriving at that percentage was reasonable and ruled that the Los Angeles County Assessor’s valuation should be based on a 94.49% allocation to California. The Assessor did not dispute that some apportionment was warranted, but said the 5.51% reduction was excessive. The Assessor applied a more simplistic test: Where was the aircraft at 12:00 midnight each day? By that standard, the TWC aircraft had been in Los Angeles 99.5% of the time.
Although it affirmed the Assessment Appeals Board’s decision on the TWC valuation issue, the trial court sided with the Assessor on the question of apportionment. Judge Yaffe said it was an abuse of discretion for the Assessment Appeals Board to require the Assessor to use the same method of apportionment as was utilized in Nevada. He remanded the case to the Assessment Appeals Board for further proceedings in accordance with his order. When the Assessor appealed the trial court decision to the Second District Court of Appeals on the valuation issue, TWC cross-appealed on the apportionment issue.
TWC argued on appeal that the Assessor’s methodology was arbitrary and unfair because it ignored situations where the aircraft were in Nevada at times other than midnight. In his oral argument before the Court of Appeal, Marvin Murray pointed out that under the Assessor’s flawed formula, an aircraft could spend as much as 23 hours and 59 minutes of a day in Nevada, but would still be subject to California assessment if it was in Los Angeles County at precisely midnight.
TWC also pointed out that if each state was allowed to apply its own assessment formula, the TWC aircraft would be subject to collective personal property taxation based upon 105.1 percent of the assessed value of the aircraft. TWC cited a number of United States Supreme Court decisions that have held that moveable personal property can acquire a tax situs in multiple states and that in such instances property tax must be fairly apportioned among the states. Relying upon those cases, TWC argued that if two or more states impose taxes in excess of 100 percent of the value of the property, they are creating an unconstitutional burden on interstate commerce.
The Second District rejected TWC’s arguments and said the apportionment issue turns on the question of whether the Assessor’s formula imposes a tax that is not rationally related to TWC’s business operations in Los Angeles County. In the appeals court’s view, the evidence supported “a rational inference that TWC was afforded substantial opportunities, benefits, and protections by California based on the presence of the three aircraft is Los Angeles County during the tax year.” The court said the Assessor’s midnight methodology was a “bright-line test” that was neither arbitrary nor improper.
The TWC Decision shows that Part 135 carriers who move their aircraft among various locations must assess their operations carefully to determine the extent to which they may be exposing their owners and their airplanes to property taxation in multiple states. The apportionment methodology that each state applies should be evaluated in order to determine the potential risk of double taxation and the extent to which that taxation may exceed 100 percent of the property’s value. For now, this case stands for the proposition that taxation based upon 105 percent of an aircraft’s value will not be overturned as excessive or an unconstitutional burden on interstate commerce.
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