Assessment of General Aircraft

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A SSESSORS ' H ANDBOOK S ECTION 577 A SSESSMENT OF G ENERAL A IRCRAFT N OVEMBER 2003 C ALIFORNIA S TATE B OARD OF E QUALIZATION C AROLE M IGDEN , S AN F RANCISCO F IRST D ISTRICT B ILL L EONARD , O NTARIO S ECOND D ISTRICT C LAUDE P ARRISH , L ONG B EACH T HIRD D ISTRICT J OHN C HIANG , L OS A NGELES F OURTH D ISTRICT S TEVE W ESTLY , S ACRAMENTO S TATE C ONTROLLER T IMOTHY W. B OYER , I NTERIM E XECUTIVE D IRECTOR AH 577iNovember 2003 F OREWORD Assessors' Handbook Section 577 (AH 577), Assessment of General Aircraft , is a complete rewrite of the March 1988 version of AH 577. This version of the handbook is reorganized and contains new or expanded topics.

It includes some text from the original manual and material concerning subjects not covered in the previous handbook. The rewrite of this handbook section was undertaken by the Board of Equalization's (Board) staff members of the Assessment Policy and Standards Division of the Property and Special Taxes Department in conjunction with the staff of the Property Taxes Division of the ... more. less.

Legal Department and is the product of staff writing at the direction of the Board. The objective of this handbook section is to give property tax appraisers, auditor-appraisers, and other interested parties an understanding of the issues concerning general aircraft for assessment purposes. It should serve as a guide and as an informational resource for the appraisal and assessment of this special, transitory type of personal property. As part of the process of producing this manual, Board staff worked with members of the California Assessors' Association, industry representatives, and other interested parties to solicit input. The Board approved this section of the handbook on November 18, 2003. Section 15606, subdivision (c), of the Government Code directs the Board to prescribe rules and regulations governing county assessors in the performance of their duties, and subdivision (f) provides that the Board shall issue instructions, such as those set forth in this handbook section. While regulations adopted by the Board are binding as law, Board-adopted assessors' handbook sections do not possess the force of law; rather they are advisory only. Nevertheless, courts have held that assessors' handbooks may be properly considered as evidence in the adjudicatory process. 1 The citations and law references in this publication were current as of the writing of the handbook section. David J. Gau Deputy Director Property and Special Taxes Department November 2003 1 Coca Cola Co. v. State Board of Equalization (1945) 25 Cal.2d 918; Prudential Ins. Co. v. City and County of San Francisco (1987) 191 Cal.App.3d 1142; Hunt-Wesson Foods, Inc. v. County of Alameda (1974) 41 Cal.App.3d 163. AH 577iiNovember 2003 T ABLE OF C ONTENTS CHAPTER 1: INTRODUCTION.................................................................................................1 D EFINITIONS ............................................................................................................................... ......1 Personal Property.............................................................................................................. ..........1 Aircraft....................................................................................................................... ..................1 Air Taxi....................................................................................................................... .................2 Certificated Aircraft.......................................................................................................... ...........2 Situs.......................................................................................................................... ....................2 Habitually Situated............................................................................................................ ..........2 Lien Date...................................................................................................................... ................3 C LASSIFICATION ............................................................................................................................... 3 E NTRY ON A SSESSMENT R OLL ..........................................................................................................3 O VERVIEW OF THE F ACTORS IN M AKING AN A SSESSMENT ...............................................................4 Assessability of Property...................................................................................................... .......4 Assessee....................................................................................................................... .................6 Situs.......................................................................................................................... ....................6 Description of Property........................................................................................................ .......6 Value of Property.............................................................................................................. ...........6 CHAPTER 2: DISCOVERY AND DESCRIPTION..................................................................8 D ISCOVERY ............................................................................................................................... ........8 Airport Owners' and Operators' Reports.....................................................................................8 Field-Canvassing............................................................................................................... ..........8 Field Appraisers............................................................................................................... ...........8 Federal Aviation Agency........................................................................................................ ......9 Referral from Other Counties................................................................................................... ...9 D ESCRIPTION ............................................................................................................................... .....9 County Aircraft Statement...................................................................................................... ...10 Other Aircraft Forms........................................................................................................... ......10 CHAPTER 3: VALUATION OF GENERAL AIRCRAFT.....................................................12 V ALUE C ONCEPT .............................................................................................................................12 A PPROACHES TO V ALUE .................................................................................................................12 Cost Approach.................................................................................................................. ..........13 Comparative Sales Approach....................................................................................................1 4 Income Approach................................................................................................................ .......17 S OURCES OF I NFORMATION .............................................................................................................18 Value Guides................................................................................................................... ...........18 Other Sources of Information................................................................................................... .18 M ANDATORY A UDIT .......................................................................................................................19 R EASSESSMENT D UE TO M ISFORTUNE OR C ALAMITY .....................................................................19 A SSESSMENT A PPEALS ....................................................................................................................19 CHAPTER 4: SITUS.............................................................................................................. ....21 AH 577iiiNovember 2003 G ENERAL A IRCRAFT .......................................................................................................................21 Aircraft Operated Solely in California......................................................................................22 Owner Domiciled in California.................................................................................................2 2 Owner Domiciled in Another State............................................................................................23 C ERTIFICATED A IRCRAFT ................................................................................................................24 C HANGE OF S ITUS ...........................................................................................................................24 CHAPTER 5: EXEMPTIONS...................................................................................................25 B USINESS I NVENTORIES ..................................................................................................................25 E XEMPTION FOR A IRCRAFT OF H ISTORICAL S IGNIFICANCE .............................................................26 Available for Display to the Public............................................................................................ 27 General Transportation......................................................................................................... ....29 Commercial Use................................................................................................................. ........29 Administration of the Exemption for Aircraft of Historical Significance..................................29 A IRCRAFT B EING R EPAIRED ............................................................................................................30 D ISPLAY IN AN A EROSPACE M USEUM .............................................................................................30 Administration of the Aerospace Museum Exemption...............................................................31 A IRCRAFT O WNED BY U NITED S TATES OR F OREIGN G OVERNMENT ...............................................31 A IRCRAFT O WNED BY C ALIFORNIA OR P OLITICAL S UBDIVISION ....................................................32 APPENDIX A: SAMPLE AIRCRAFT STATEMENT...........................................................33 APPENDIX B: REVENUE AND TAXATION CODE............................................................35 APPENDIX C: PROPERTY TAX RULES..............................................................................39 Chapter 1 AH 577November 2003 1 C HAPTER 1: I NTRODUCTION This handbook section pertains to the assessment and taxation of general aircraft as described in sections 5301 through 5456 of the Revenue and Taxation Code. 2 For purposes of property taxation, general aircraft are classified as personal property. The appraisal and assessment of general aircraft present challenges unique to this special type of property. These challenges arise because of the transitory nature of general aircraft, their various configurations and applications of use, the diversity of manufacturers, the varying condition of aircraft, and the specific types of avionics installed on the aircraft. D EFINITIONS P ERSONAL P ROPERTY Personal property is defined by exception; personal property is all property except real estate. 3 Section 104 defines real property, or real estate, as: (a) The possession of, claim to, ownership of, or right to the possession of land. (b) All mines, minerals, and quarries in the land, all standing timber whether or not belonging to the owner of the land, and all rights and privileges appertaining thereto. (c) Improvements. A IRCRAFT Revenue and Taxation Code section 5303 defines aircraft as: & any contrivance used or designed for the navigation of or for flight in the air which has been flown at least once, other than a parachute or similar emergency safety device. Aircraft does not include any of the following: 1. Air taxis, as defined in section 1154. 2. Aircraft operated exclusively by certified air carriers 3. Rockets or missiles Ultra-lights, hang gliders, and hot air balloons are examples of less conventional flying contrivances which, once flown, are aircraft within the meaning of section 5303. 2 All statutory references in this handbook refer to the Revenue and Taxation Code unless otherwise indicated. 3 Section 106. Chapter 1 AH 577November 2003 2 A IR T AXI Air taxi is defined in section 1154 as: &aircraft used by an air carrier which does not utilize aircraft having a maximum passenger capacity of more than 30 seats or a maximum payload capacity of more than 7,500 pounds in air transportation and which does not hold a certificate of public convenience and necessity or other economic authority issued by the Civil Aeronautics Board of the United States, or its successor, or by the California Public Utilities Commission, or its successor. This definition can be further broken down into scheduled and nonscheduled air taxis. Scheduled air taxis are treated for property taxation purposes as certificated aircraft, and nonscheduled air taxis are treated as general aircraft. C ERTIFICATED A IRCRAFT Section 1150 defines certificated aircraft to mean: & aircraft operated by an air carrier or foreign air carrier engaged in air transportation & while there is in force a certificate or permit issued by the Civil Aeronautics Board of the United States, or its successor, or a certificate or permit issued by the California Public Utilities Commission, or its successor, authorizing such air carrier to engage in such transportation. 4 For a complete discussion of this topics, see Assessors' Handbook Section 570, Assessment of Commercial Aircraft . S ITUS Situs is the place where property is legally situated; the more or less permanent location of the property. A complete discussion of aircraft situs is included in Chapter 4. H ABITUALLY S ITUATED Rule 205, subsection (b), provides that general aircraft are assessable in the county where they are habitually situated . 5 The location where an aircraft is habitually situated is the airport at which the aircraft is usually present when not in flight, i.e., the location where the aircraft spends most of its ground time. Thus, if an aircraft spends a substantial amount of time at multiple airports, it is habitually situated at the airport where it spends the most ground time. 4 The Federal Aviation Agency is the successor of the Civil Aeronautics Board of the United States. 5 All references to "rules" refer to sections in Title 18, Public Revenues, California Code of Regulations, commonly known as Property Tax Rules. Chapter 1 AH 577November 2003 3 L IEN D ATE Sections 2192 (local roll) and 722 (Board roll) specify that the annual lien date is January 1. Personal property is assessable only if taxable on this date. 6 C LASSIFICATION Aircraft are included on the local unsecured roll as personal property and are assessable to the owner, whether the owner is an individual, a business, or otherwise. The tax rate for property on the unsecured roll is levied at the rate for the preceding year's secured roll within the same taxing jurisdiction. 7 Since aircraft are classified as personal property, they are not subject to special assessments. Unlike most types of personal property, there is no requirement that aircraft be used for business purposes to be assessable. However, not all aircraft are taxable. Some aircraft may be fully or partially exempt from property taxation due to the nature of their ownership or use. Preferential assessments and exemptions are discussed in Chapter 5. E NTRY ON A SSESSMENT R OLL An assessment roll , as defined in section 109, is the entire listing of taxable property within the county. 8 The assessment roll consists of two parts: the secured roll and the unsecured roll. Aircraft should be included on the regular assessment roll and enrolled as unsecured property. Aircraft assessments should be placed in a separate section of the unsecured roll, rather than intermingling them with other unsecured assessments. Rule 252, subsection (a), provides that each local assessment roll shall contain: & (14) In a separate section of the roll, the assessed value of any personal property for which tax revenues are subject to allocation in a manner different from that provided for general property tax revenues (e.g., general aircraft). 9 Advantages of enrolling aircraft in a separate section on the unsecured roll include: " Simplifying roll-searching for the assessor, tax collector, and others when a permanently assigned block of assessment numbers serves to identify aircraft. " Making statistical data more readily available. " Eliminating taxpayer confusion that often occurs when the value of an aircraft is included in the total personal property value of other types of taxable personal property. 6 Exceptions are manufactured homes and floating homes, although classified as personal property, are assessed in the same manner as real property. See section 229 and sections 5802 et seq. 7 California Constitution, article XIII, section 12. 8 The assessor prepares two separate rolls each year: the regular assessment roll and the supplemental assessment roll. 9 See sections 5451, et seq. Chapter 1 AH 577November 2003 4 " Avoiding the necessity of adding the tax on the aircraft to an impound account when a lending institution pays the tax on the real property and secured personal property. O VERVIEW OF THE F ACTORS IN M AKING AN A SSESSMENT The making of an assessment requires the determination of seven factors for that assessment to be proper and complete. These seven factors are especially important for personal property assessments because they can be difficult to determine and they often tend to change from lien date to lien date. The seven factors are assessability, assessee, situs, description, classification, security, and value . Of the seven factors involved in making an assessment, the appraiser only needs to consider five of the factors with respect to aircraft. Two of the factors 4 classification and security 4are already determined due to the nature of aircraft. That is, all aircraft are classified as personal property, and they should be listed on the unsecured regular assessment roll. A brief description of each of the other five factors is included below. A more thorough discussion of description, value , and situs are included in later chapters of this manual. 10 A SSESSABILITY OF P ROPERTY Article XIII, section 1, of the California Constitution provides that all property is taxable unless otherwise exempt by the state constitution or the laws of the United States. The Legislature has the power to exempt personal property from taxation or to allow for differential taxation. 11 For example, section 224 provides: The personal effects, household furnishings, and pets of any person shall be exempt from taxation. The phrase "personal effects, household furnishings, and pets" does not include boats, aircraft, vehicles, or personalty held or used in connection with a trade profession or business or pets so held or used. An aircraft can be exempt from property taxation by reason of its ownership, use, and/or type. For example, an aircraft dealer's inventory is exempt by type (a discussion of business inventories and other exemptions is included in Chapter 5). The assessor must first determine whether an aircraft is taxable (assessable) or exempt. 12 It is important for the appraiser to be aware of all possible aircraft exemptions in order to determine the assessability of the aircraft being appraised. In determining assessability, an aircraft is not assessable until it has been flown once. 13 An aircraft that is not presently in flyable condition but that still has an active registration with the FAA would be assessable. The maintenance of an active FAA registration would be evidence of 10 For a complete discussion of this topic, see Assessors' Handbook Section 504, Assessment of Personal Property and Fixtures , Chapter 1. 11 Article XIII, section 2, California Constitution. 12 For purposes of property tax assessment and this text, taxable and assessable are used synonymously. 13 Section 5303. Chapter 1 AH 577November 2003 5 an intent to make the aircraft flyable at some future point in time. If the registration has been cancelled by registering the aircraft as scrapped or dismantled with the FAA, then the parts which were formerly an aircraft would be treated in the same manner as other personal property owned by the assessee. Aircraft are assessable if they have situs in a particular county on the lien date, and the assessment must be made timely to be valid. Section 532 establishes a statute of limitations that affects the assessability of all taxable property, including aircraft. Unless the assessee intentionally evades taxation, an assessment must normally be made within four years of the assessment period in which the property escaped assessment or was underassessed. 14 The assessor is required to assess all aircraft as of the lien date. 15 For example, an assessee filing a statement with the assessor that declares ownership of an aircraft as of 12:01 a.m., January 1, 2003, will receive a tax bill for the fiscal year July 1, 2003 through June 30, 2004. The following is an example of how the lien date affects the assessment of an aircraft. E XAMPLE 1.1 L IEN D ATE On lien date January 1, 2003, an aircraft owned by "A" is located in Sacramento. The assessee (owner "A") sells the aircraft to an airplane dealer (owner "B") on January 15, 2003. It becomes business inventory to owner "B" on that date. Owner "A" receives a tax bill for the fiscal year July 1, 2003 through June 30, 2004 for the assessment of the aircraft. Although owner "A" does not own the aircraft during the fiscal year that the bill covers, the bill is valid based on ownership on the lien date. Taxes on unsecured property are due on the lien date. If the facts were changed so that the dealer was the owner on the lien date and sold the aircraft to "A" on January 15, the aircraft would be exempt from property taxation as business inventory of owner "B," even through owner "A" owned the aircraft from January 15 through June 30, 2004. Generally, ownership on the lien date determines the taxability, situs, and assessee of an aircraft. Property taxes on the unsecured roll as of July 31 are payable in one installment, due no later than the August 31 following the lien date. 16 14 Section 532. 15 Section 401.3. 16 Section 2922. Chapter 1 AH 577November 2003 6 A SSESSEE An aircraft is assessed to the person owning, claiming, possessing, or controlling it on the lien date 4the assessee . 17 Assessments are usually made in the name of the person listed as the owner of record on the lien date, based on the official documentation or registration for the aircraft. Owners who sell their aircraft after the lien date and prior to the fiscal year that the tax bill covers are still liable for the taxes imposed. 18 Although the assessment is based on the value of the aircraft on the preceding lien date, the tax bill received is for the ensuing fiscal year. Thus, in the sale of an aircraft, any proration of taxes is left to the parties involved. S ITUS Situs is the place where property is situated for tax purposes. Since aircraft are taxed where they are situated on the lien date, situs is an essential factor in making an assessment of an aircraft. Situs is seldom a problem for property that remains in one location, as in the case of real property, but many problems are encountered by the appraiser when determining the proper situs of movable property, such as an aircraft. A complete discussion of situs is included in Chapter 4. 19 D ESCRIPTION OF P ROPERTY An accurate assessment requires a description of the property. The primary source of descriptive information for the appraiser is on annual forms filed by aircraft owners. The forms request information needed by the appraiser to make an annual review and accurate assessment of the aircraft. A more detailed discussion regarding description of the property and aircraft forms are included in Chapter 2. V ALUE OF P ROPERTY For purposes of California property taxation, aircraft are valued at their fair market value every year as of the lien date. An appraiser's most important function is to determine the value of the 17 Section 405. 18 Estate of Backesto (1923) 63 Cal.App. 265. 19 For a complete discussion of this topic, see Assessors' Handbook Section 504, Assessment of Personal Property and Fixtures , Chapter 3. Chapter 1 AH 577November 2003 7 aircraft. The terms "fair market value" and "full cash value" have the same meaning in property tax law and in the context of this manual. 20 A more detailed discussion of value is presented in Chapter 3. 20 Section 110. Chapter 2 AH 577November 2003 8 C HAPTER 2: D ISCOVERY AND D ESCRIPTION D ISCOVERY Developing a program for the discovery of information regarding taxable aircraft and the verification of new and existing information is important to ensure accurate and valid assessments. Although the means of discovery may differ from county to county, the primary sources of information for aircraft are: " Airport owners' and operators' reports " Field canvassing " Field appraisers " Federal Aviation Agency (FAA) registration lists " Referrals from other counties A IRPORT O WNERS ' AND O PERATORS ' R EPORTS Section 5366 requires owners and operators of public and private airports to annually supply the assessor with lists of aircraft based at their airports. This information is provided on Form BOE-577-B, List of Aircraft . The airport owners are required to provide to the assessor (1) the owner's name and address and (2) the FAA number, make, model, and year of manufacture for each aircraft. This information is extremely useful to the assessor in locating all aircraft situated in the county. F IELD -C ANVASSING Field-canvassing is a technique that involves physically viewing aircraft where they are located. Information obtained by the appraiser should be entered into the aircraft file to ensure that an accurate assessment is made without incurring any duplication. The FAA number should always be obtained, along with all other available information about the aircraft, e.g., situs, make, model, year of manufacture, general condition, flight hours since last overhaul, and ownership. The appraiser should conduct field-canvassing near the lien date. Since ultralights, hang gliders, and power hang gliders do not have an FAA number, they pose a significant discovery problem for assessors. Staff should be made aware of this problem and discovery programs should be established, such as field-canvassing airports, landing strips, and other areas where these aircraft are known to be situated. F IELD A PPRAISERS General aircraft may also be discovered by field appraisers while conducting appraisals of other properties. Any aircraft located that are not listed in the assessors' files should be investigated to determine their taxable status. Chapter 2 AH 577November 2003 9 F EDERAL A VIATION A GENCY County assessors can obtain registration information from the FAA master registration program through the FAA Web site (www.FAA.gov). Once on the FAA Web site, the registry information can be accessed by: " Clicking on General Aviation " Under the column Services , click on Query Aircraft Database " Click on Link to Perform Query " Click on State and County " Select California " Select appropriate County The FAA updates the registration list on a monthly basis to show any changes in ownership of aircraft based in California. The information provided includes a coded description of each aircraft, and the zip code number and the name of the registered owner. R EFERRAL FROM O THER C OUNTIES Often county assessors receive information from a taxpayer indicating that an aircraft has been relocated to another county. This information can be useful in determining accurate situs. Cooperation between county assessors is essential for the proper assessment of all aircraft within the state. Without it, many aircraft would escape assessment and accurate information regarding the description, ownership, and situs of such aircraft could be lost (see Change in Situs section in Chapter 4 for a further discussion). An assessor frequently receives information indicating that an aircraft has been taken to another county or was actually in a different county than was initially reported. This information should be forwarded to the assessor gaining jurisdiction, along with all other information that may be available, such as aircraft description and previous assessed values. It is important that the county receiving the information follow through to the point of making an assessment. If neither the aircraft nor the aircraft owner can be located, the county originating the information should be notified so that further action can be taken to prevent an escape assessment. The originating county should send a notice to the aircraft owner's last known address to attempt to establish the exact location of the aircraft. D ESCRIPTION In order for an appraiser to make a comprehensive review and assessment of an aircraft, a detailed and accurate description of the aircraft is essential. Aircraft statements and other aircraft forms used by the assessor provide vital information. Chapter 2 AH 577November 2003 10 C OUNTY A IRCRAFT S TATEMENT Assessors send aircraft statements to owners requesting information on their aircraft. Section 5365 provides that: Upon request of the assessor of the county in which an aircraft is habitually based, the owner shall file with him a statement setting forth the make, model, and year of manufacture of the aircraft. Assessors use these statements to gather information and to ultimately determine an assessable value for aircraft. Furthermore, if the assessor requires that these forms be completed by aircraft owners annually, they are often very useful in a timely determination of when owners have installed new avionics on an aircraft or when an aircraft has undergone an overhaul. The aircraft statement should be mailed to the taxpayer for completion as close to the lien date as possible. If any person who is requested by the assessor to file a statement pursuant to section 5365 fails to file such statement by the time specified by the assessor, a penalty of 10 percent of the market value of the unreported aircraft shall be added to the value of the aircraft on the current roll. 21 While the statute does not specify the length of time the assessor should allow to file the aircraft statement before imposition of the penalty, it is recommended that the deadline for filing without a penalty be 30 days after the mailing date or April 1 (as for other property statements), whichever is later. While section 5365 only mandates that the assessee provide the assessor with the make, model, and year of manufacture of the aircraft, it is good policy for the assessor to request all pertinent information from an aircraft owner annually, since usually assessees will provide the information requested by the assessor. However, the assessor should remember that the section 5367 penalty cannot be imposed on an aircraft owner for not supplying information requested by the assessor beyond the requirements of section 5365. A sample of an aircraft statement is included in Appendix A. 22 O THER A IRCRAFT F ORMS Many county assessors use the Vessel or Aircraft Form (BOE-576-A) to enhance their aircraft assessment program. The form can be used for the following purposes: 1. To notify the owner of record of the assessor's proposed assessed value of an aircraft for the forthcoming year. 2. To obtain information on transfers of aircraft. 3. To locate an aircraft. 21 Section 5367. 22 The Board does not prescribe a property statement for general aircraft. Chapter 2 AH 577November 2003 11 The Vessel or Aircraft Form should be mailed to all owners of aircraft as shown on the assessor's records prior to the lien date each year. In addition, the Aircraft Form (BOE-577-AHH) is a double postcard inquiry form that is folded and mailed to known or probable aircraft owners at any time of the year. Upon receipt of the card, the aircraft owner should detach the half containing his or her name and address, and return the preaddressed remaining half with the information requested by the assessor. This form can be used to obtain the following information: 1. Verification of the registered owner's name and address. 2. Specific description of the aircraft, e.g., FAA number, make, model, and equipment installed. 3. Detailed description of the engine, e.g., make, model, year built, and air hours. 4. Sales information, e.g., purchase price and date of purchase. Chapter 3 AH 577November 2003 12 C HAPTER 3: V ALUATION OF G ENERAL A IRCRAFT The following is a brief overview of basic appraisal terms and accepted appraisal practices. For a more in-depth discussion of appraisal practices and the approaches to value property, see Assessors' Handbook Section 501, Basic Appraisal ; Assessors' Handbook Section 502, Advanced Appraisal ; and Assessors' Handbook Section 504, Assessment of Personal Property and Fixtures . V ALUE C ONCEPT The fundamental principles of appraisal apply to the valuation of aircraft as they do to any other personal or real property. The assessor should consider the three primary approaches to value 4 cost, comparative sales, and income 4when determining the market value of an aircraft. Although the approaches to value are similar, the assessment of aircraft and other personal property differ significantly from real property in that the market value of an aircraft must be estimated on the lien date every year. Unlike most real property, the assessment of aircraft is not governed by the base year value limitations of article XIII A of the California Constitution (commonly known as Proposition 13). The fair market value of aircraft, like all other types of property, is defined in section 110, subdivision (a): & "full cash value" or "fair market value" means the amount of cash or its equivalent that property would bring if exposed for sale in the open market under conditions in which neither buyer nor seller could take advantage of the exigencies of the other, and both the buyer and the seller have knowledge of all the uses and purposes to which the property is adapted and for which it is capable of being used, and of the enforceable restrictions upon those uses and purposes. A PPROACHES TO V ALUE Property Tax Rule 3, Value Approaches , discusses five approaches to value: 1. Comparative sales approach 2. Stock and debt approach 3. Replacement or reproduction cost approach 4. Historical cost approach 5. Income approach The replacement or reproduction cost, comparative sales, and income approaches are applicable to personal property, including aircraft. Although these three approaches to value should be Chapter 3 AH 577November 2003 13 considered, the use of all three may not always be appropriate. The nature of property, its market, and the availability of data will normally indicate which approach(es) is most appropriate. This is supported by Rule 3, which states in part: In estimating value as defined in section 2, the assessor shall consider one or more of the following [approaches to value], as may be appropriate for the property being appraised : (Emphasis added.) Often only one approach is feasible. The appraiser should analyze all available information to determine the most applicable and reliable approach. The courts recognize this fact and the California Supreme Court has stated that: Assessors generally estimate value by analyzing market data on sales of similar property, replacement costs, and income from the property, and since no one of these methods alone can be used to estimate the value of all property, the assessor, subject to requirements of fairness and uniformity, may exercise his discretion in using one or more of them. 23 C OST A PPROACH One variant of the cost approach, the replacement cost approach , estimates the value of an asset or a group of assets based on the assets' original or historical cost, adjusted to account for changes in value since purchase and/or installation. It is the method of valuation most frequently relied on when no reliable sales data are available. Replacement cost new, in the case of a new or nearly new aircraft and when considered along with normal depreciation, will be a strong indication of market value in the case of aircraft that continue to be manufactured. As aircraft grow older, however, an estimate of depreciation is less predictable and the accuracy of this approach diminishes. The cost approach method typically used by assessors estimates the value of an aircraft based on its original or historical cost. 24 When an aircraft of any type is new, this approach may be a good representative of market value, provided the original cost was an arm's-length open-market transaction representing fair market value. 25 In the case of older aircraft, the cost approach is generally not used, and nationally published value guides that provide annual market values based on a large collection of sales data become a more feasible method of establishing a value for aircraft. Unique aircraft, kit aircraft, and aircraft built by little known manufacturers should be valued by the cost approach unless reliable sales data are available. Such aircraft previously owned can be accurately valued by the comparative sales approach; however, the appraiser must be familiar with the aircraft used as comparisons. In most cases, the appraiser will have to make a physical 23 De Luz Homes, Inc . v. County of San Diego (1955) 45 Cal.2d 546, 563-564. 24 Rule 6 uses the terms historical cost and original cost synonymously 4the cost of the property when new. For purposes of this manual, the terms are used as defined in Rule 6. 25 Section 110. Chapter 3 AH 577November 2003 14 survey of the subject aircraft and compare it to recent sales of similar aircraft. Finding comparable sales of unique aircraft may be difficult. C OMPARATIVE S ALES A PPROACH The comparative sales approach may be defined as an approach that uses direct evidence of the market's opinion of value of a property. In this approach, the appraiser estimates the market value of the subject property by comparing it to similar properties that have recently sold. In addition to actual sales, the appraiser may consider listings, options, and the opinions of owners, real estate agents, and other appraisers as to the selling prices that comparable properties might command. The comparative sales approach is based on the premise that the fair market value of a property is closely and directly related to the sales prices (under the conditions of fair market value) of comparable, competitive properties. Sale prices of comparable properties provide an indication of what the market is willing to pay for that type of property at a specific time. For personal property such as aircraft, nationally published value guides that reflect the going market price for comparable aircraft can be used as the basis for determining market value when no direct sale comparables in the subject's market area are found. Adjustments should be made to the base price given in a value guide when the condition of the aircraft or the local market merits such action. In January 1997, in fulfillment of the mandates in section 5364, the Board held a public hearing and officially adopted two aircraft price guides for assessors to use when determining the assessment of general aircraft (see discussion on value guides later in this chapter). In addition, the Board advised assessors to use 90 percent of the retail price listed when using the aircraft value guides as the starting point for the appraisal of general aircraft. In comparing the value guides to other information (such as actual sales of aircraft and opinions from dealers and assessors), Board staff found the retail values listed in the guides were, on the average, slightly but consistently higher when compared to fair market value. Airplane dealers commonly sell aircraft at the retail prices, but private party transactions typically indicate lower prices. The difference in price could be due to several factors, such as a dealer detailing an aircraft so it is actually in above-average condition, a dealer offering a warranty on the aircraft, or a dealer offering free flying lessons or other services with the aircraft. Consequently, the listed retail values shown in the value guides should be reduced by 10 percent to account for dealer incentives and reconditioning to value an aircraft in average condition on the lien date. Other adjustments that may be appropriate include consideration of the: " Overall condition of the aircraft " Equipment installed Chapter 3 AH 577November 2003 15 " Hours since a major engine overhaul " Total airframe hours Another adjustment to consider is the location of the subject aircraft. The base price shown in the guides may reflect values in a specific region, and the appraiser should adjust the value for regional differences as suggested in the guide. Sales tax is not included in the values shown in any of the value guides. The general rule in determining market value is that where price is the basis of value, sales/use tax, freight, and installation cost are elements of that value, and should be included in the estimate of market value. 26 There are exceptions to the general rule. Equipment rented to federal instrumentalities and aircraft used by common carriers (neither of which are subject to sales tax), for example, are valued without sales tax as an element of value. The reason in both cases is that the consumer (the federal government or the air carrier) is never liable for sales tax on purchases of such equipment. Consequently, the assessment of such property should not include sales tax, unless or until the property is put to private use or rented to a private party. 27 The addition of sales tax and freight charges to the list price of an aircraft is consistent with the appraisal approach that gives consideration to the consumer's total cost in arriving at market value. Since an owner has the sales tax and freight (transportation) information available from the invoice, the owner should be requested to include this information on the county aircraft statement. When reliable comparables are available, whether from sales found in the local marketplace, published value guides, or other sources, the comparative sales approach may be preferable to other value approaches. The following is an example where such sales are available, and the aircraft's value is determined using the comparative sales approach. 26 Xerox Corp . v. Orange County (1977) 66 Cal.App.3d 746. 27 See the Sales and Use Tax Law for more information regarding sales tax requirements. Chapter 3 AH 577November 2003 16 E XAMPLE 3.1 U SE OF THE C OMPARATIVE S ALES A PPROACH Ben Airworthy purchased a 1970 Cessna 180H in 1993 for $52,750. On the 2003 lien date, the aircraft was hangared in Sacramento County and was assessable. The following information was available to and gathered by the appraiser. " The assessee is planning to sell the aircraft. " The assessee's golf partner offered to purchase the aircraft for $54,000. " A similar aircraft, located in Florida, is advertised in Trade-A-Plane for $115,500. " An inspection of the aircraft, flight log, maintenance log, and conversations with the assessee indicate the following: ?Aircraft has low airframe hours (3,500) ?Engine hours are excessive (1,200) ?Needs exterior paint ?Needs complete new interior ?Equipped with floats from factory ?Average avionics with added DME (Distance Measuring Equipment) " Research from the Winter 2002/2003 Edition of Aircraft Bluebook- Price Digest indicates a factory new standard price of $65,000, an average-equipped price of $69,000, and an average retail price of $80,000. " The assessee argues that the aircraft's value is $54,000. Using the comparative sales approach to value, what is the estimated taxable value of the aircraft? The assessee's estimate of value of $54,000 does not represent market value because it is only an offer from an acquaintance, not an actual sale, nor was the aircraft exposed for sale in the open market. The aircraft advertised in Trade-A-Plane is not market value because it is only an offer to sell and not an actual sale. The appraiser in this instance would use as a starting point the average retail price of $80,000 found in the Winter Edition of the Aircraft Bluebook -Price Digest, reduce that value by 10 percent, 28 and then add the appropriate sales tax (in this example, 7.75 percent for Sacramento County). The adjustments for airframe, engine time, paint, interior, floats, and additional avionics would be made as follows per guidelines in the Bluebook : (Continued) 28 See discussion earlier in this chapter regarding 10 percent reduction. Chapter 3 AH 577November 2003 17 E XAMPLE 3.1 (Contd.) Average RetailItem Description $80,0001970 180H (average retail price in Bluebook ) -8,000Deduct 10% (SBE adjustment from Bluebook price) 135*Add for low airframe hours (+2% for late model) -4,748*Deduct for high engine time -4,000*Deduct for needing new exterior paint -4,000*Deduct for needing new interior 8,640*Add for floats (Aqua Float Co. Model 3190 Pontoons) 1,125Add for DME (Bendix/King KDM 700A) $69,152Subtotal 5,359 Add 7.75% (sales tax for Sacramento County) $74,511Estimated total value of aircraft The appraiser would estimate the value of the aircraft for the January 1, 2003 lien date at $74,515. *Calculations: Low airframe hours: 107 hr/yr. 114 hr/yr. = 94% low time airframe x 2% High engine time: Time Between Overhauls 1500, 750 mid, 1200-750 = 450 (450 x $10.55/hr = $4747.50) New paint: $8,000 172,177 est. @ ½ cost New interior (re-rag): $8,000 4 seat est. @ ½ cost Floats: Model 3190 Pontoons 3 40% of $28,800 @ ½ cost I NCOME A PPROACH The income approach to value includes any method of converting an anticipated income stream into a present value estimate. The income approach generally is less effective in valuing aircraft for several reasons: " A business dependent upon the use of an aircraft may be shown to benefit from the aircraft because of their use, but this is unlikely to be an indication of value for any particular aircraft. " One model of an aircraft may have different full-time commercial or pleasure applications, and the income approach might indicate different values for the same model, depending upon its use. " The income approach relies on information concerning income and expenses on the aircraft being valued. To determine the capitalization rate of the aircraft, net income Chapter 3 AH 577November 2003 18 information from the operations of other similar aircraft sold would also be required. Cooperation from owners regarding such data is often limited. Furthermore, there are no published sources with regard to market income information on aircraft. If the appraiser does collect income data, he or she must then carefully analyze it to determine if the information is typical of the market for the subject aircraft. S OURCES OF I NFORMATION When using the comparative sales approach to value aircraft, data sources include published value guides and the Internet. V ALUE G UIDES In compliance with section 5364, the Board has approved the Aircraft Bluebook- Price Digest as the primary guide for valuing general aircraft, and the Vref Aircraft Value Reference as an alternate for aircraft not listed in the Aircraft Bluebook . 29 The Winter Edition of the Aircraft Bluebook and Volume I of the Vref Aircraft Value Reference are recommended. There is an electronic version of the Aircraft Bluebook- Price Digest available by subscription at aircraftbluebook.com. As discussed earlier, the values listed in the guides should be reduced by 10 percent to account for dealer incentives and reconditioning to provide reasonable estimates of market value for aircraft in average condition on the lien date. The retail values listed in Vref and the Aircraft Bluebook are for a fully airworthy aircraft with average equipment for the model and in average condition considering the aircraft's age and likely use. For any given model, there are extreme variations in value depending on the equipment installed in the aircraft and the amount of time (usually operating hours) before a costly major engine overhaul is required. As a result, in order to achieve fair market value, it is necessary to review the equipment and condition of each aircraft and make appropriate adjustments to the basic value indicated by the guide. Appraisers should make appropriate adjustments for, among other things, overall condition, equipment, hours since the last major overhaul, and total hours. Sometimes appraisers obtain valid information, such as recent sales, that provide more accurate value indicators for a specific aircraft than the data in the value guides. Appraisers should make any adjustments to the base value in the guides as necessary to achieve fair market value assessments of aircraft. However, variances from the values indicated by use of the recommended value guides should be well documented in the assessor's records. O THER S OURCES OF I NFORMATION The Internet can be a useful source of information when establishing the market value of aircraft. Various Web sites show current listings of aircraft for sale. This information can provide the appraiser with general marketplace information. 29 Public hearing conducted by the State Board of Equalization, January 10, 1997. Chapter 3 AH 577November 2003 19 In addition, listings may be found in numerous flying magazines. Some of these magazines also have classified advertisements on the Internet. M ANDATORY A UDIT Revenue and Taxation Code section 469 provides in part: In any case in which locally assessable trade fixtures and business tangible personal property owned, claimed, possessed, or controlled by a taxpayer engaged in a profession, trade or business has a full value of four hundred thousand dollars ($400,000) or more, the assessor shall audit the books and records of that profession, trade, or business at least once each four years&. General aircraft owned, claimed, possessed, or controlled by a taxpayer engaged in a profession, trade, or business are subject to the provisions of section 469 and should be considered when determining the $400,000 threshold for a mandatory audit. When conducting an audit of a business that includes an aircraft, the auditor should ensure that sufficient information for the aircraft is obtained so that an accurate assessment can be enrolled, e.g., FAA number, make, model, year of manufacture, engine hours, equipment, condition. R EASSESSMENT D UE TO M ISFORTUNE OR C ALAMITY If an aircraft has been damaged or destroyed by a misfortune or calamity, the owner may request that the aircraft be reassessed downward to reflect its current value in the damaged condition. This reassessment procedure is available only in counties that have adopted an ordinance pursuance to section 170. Subdivision (a) of section 170 states in part: & the board of supervisors may, by ordinance, provide that every assessee of any taxable property , or any person liable for the taxes thereon, whose property was damaged or destroyed without his or her fault, may apply for reassessment of that property&. (Emphasis added.) Accordingly, aircraft damaged or destroyed by a misfortune or calamity would be subject to the relief provisions of this section, assuming the county board of supervisors has adopted an authorizing ordinance. A SSESSMENT A PPEALS General aircraft are governed by the same statutes and regulations for the assessment appeals process as all other property use types that are subject to local property taxation. 30 Aircraft owners must file an Application for Changed Assessment form 31 with the local board of 30 Sections 1601 et seq.; Rules 301 through 326. 31 Form BOE-305-AH. Chapter 3 AH 577November 2003 20 equalization or assessment appeals board, within the appropriate statutory timeframe, 32 to initiate the equalization process. Specific procedures and guidelines for the local assessment appeals process are contained in the Assessment Appeals Manual published by the Board. 32 Sections 170, 1603, and 1605. Chapter 4 AH 577November 2003 21 C HAPTER 4: S ITUS Situs , the place where property is legally situated, is one of the essential factors of a valid assessment. Section 404 governs the assessment jurisdiction for property and provides that: All taxable property, except State assessed property, shall be assessed by the assessing agency of the taxing agency where the property is situated. Aircraft are classified as personal property, are mobile, and frequently have no single fixed location. One of the most important duties of the appraiser is to determine an aircraft's tax situs. For property tax purposes, an aircraft's situs is established on the lien date. On the lien date, aircraft with situs in California are assessable by the taxing agency of the jurisdiction in which they are habitually situated. Permanent versus temporary situs must be considered when determining taxable situs for property taxation purposes. Article XIII, section 14, provides that: All property taxed by local government shall be assessed in the county, city, and district in which it is situated. This constitutional provision does not refer to the temporary location of aircraft but to its permanent situs. Situated means that property has acquired tax situs and, thus, the taxation of an aircraft must be based on the fact that it is to some extent kept or maintained in California, rather than here casually or in transit. The guidelines for situs of aircraft depend on aircraft type. For assessment purposes, aircraft are typed or classified as general aircraft, certificated aircraft, or air taxis. This handbook focuses on the issues affecting situs of general aircraft. G ENERAL A IRCRAFT The rules of situs apply to general aircraft as they do to other personal property. General aircraft are assessable at the location where the aircraft is habitually situated. When an aircraft has tax situs in California and divides its time between two or more airports in California, situs becomes determinable based on a "time test," but no apportionment is necessary. Rule 205, subsection (b), states in pertinent part: & An aircraft that spends a substantial amount of ground time at each of two or more airports has its tax situs at the airport where it spends the greatest amount of ground time. Thus, where an aircraft does not remain in one location in California, it is assessable in the place where it spends the greatest amount of ground time. 33 33 GeoMetrics v. County of Santa Clara (1982) 127 Cal.App.3d 940. Chapter 4 AH 577November 2003 22 If an aircraft establishes tax situs both in California and outside California, apportionment is necessary between California and other jurisdictions under the rulings established in Ice Capades, Inc. v. County of Los Angeles and GeoMetrics v. County of Santa Clara . 34 The interpretation of tax situs is that property must have "such contacts as confer jurisdiction to tax." 35 Due process requires that the nature of the contacts sufficient to support a state's power to tax must provide the opportunities, benefits, or protection afforded by the state. 36 For movable personal property such as aircraft, 37 the amount and nature of the contact of property and its owner with a state necessary to establish tax situs is a factual determination. 38 In general, relevant factors to be considered include the domicile of the aircraft owner, the aircraft's length of time in the state, the owner's intent to bring the aircraft into the county, and the owner's contact with the state. The court held that these were the determinative factors in Ice Capades A IRCRAFT O PERATED S OLELY IN C ALIFORNIA For aircraft maintained and operated solely within California, such aircraft have an established tax situs in California, regardless of the domicile of the aircraft owner, and the appropriate county in which the aircraft is habitually situated has assessment jurisdiction without apportionment. 39 Aircraft having mere transitory contact in California do not have an established tax situs in this state and, therefore, are not subject to taxation. Example 1 An aircraft owner has domicile in Nevada, and the aircraft owned has established a tax situs in California for 100 percent of the year. Regardless of where the owner of the aircraft is domiciled, the California county where the aircraft is habitually situated would enroll 100 percent of the value of the aircraft. O WNER D OMICILED IN C ALIFORNIA When an aircraft owner is domiciled in California and the aircraft (1) has established a tax situs in California, (2) has established a tax situs in another state, states, or foreign country, (3) operates in other states or foreign countries but does not establish tax situs in those states or foreign countries, and (4) is predominantly located in California during the year, the county may assess portions of value reflecting the portion of the year that the aircraft is present in California and the portion of the year that the aircraft operates in the states or foreign countries where the aircraft has not established tax situs. 34 Ice Capades, Inc . v. County of Los Angeles (1976) 56 Cal.App.3d 745; GeoMetrics v. County of Santa Clara (1982) 127 Cal.App.3d 940. 35 Zantop Air Transport, Inc . v. County of San Bernardino (1966) 246 Cal.App. 2d 433, 437. 36 Ice Capades, Inc., supra at 752. 37 Rule 205, subsection (a). 38 Ice Capades, Inc., supra at 753. 39 Ice Capades, Inc., supra at 755. Chapter 4 AH 577November 2003 23 Example 2 An aircraft owner has domicile in California, and the aircraft owned has established a tax situs in California for 60 percent of the year. The aircraft has also established a tax situs in another state or a foreign country for 20 percent of the year. The other 20 percent of the time, the aircraft is flown in an out of five other states, but does not establish tax situs in any of the five states. Because the aircraft is predominantly located in California and/or because the aircraft owner has domicile in California during the year, the California county where the aircraft is habitually situated would enroll 80 percent of the value of the aircraft. O WNER D OMICILED IN A NOTHER S TATE When an aircraft owner is domiciled in a state other than California and the aircraft (1) has established a tax situs in the owner's domiciliary state, (2) has established a tax situs in California, and (3) operates in another state, states, or foreign country, the county may assess portions of value reflecting only the portion of the year that the aircraft is present in California. In other words, the value is apportioned for only the time spent in California. Example 3 An aircraft owner has domicile in Arizona, and the aircraft owned has established a tax situs in California for 60 percent of the year. The aircraft has also established a tax situs in Arizona for 20 percent of the year. The other 20 percent of the time, the aircraft is flown in an out of five other states or foreign countries, but does not establish tax situs in any of the five states or foreign countries. Because the owner of the aircraft is domiciled outside of California, the California county where the aircraft is habitually situated would enroll 60 percent of the value of the aircraft. To assist the appraiser in determining situs for allocation purposes, the appraiser may request certain documents from the taxpayer. Documents that may be useful include, but are not limited to, hangar or tie-down receipts, flight or maintenance logs, and paid tax bills from another county, state, or country. To assist the appraiser in determining the domicile of the aircraft owner (whether an individual or a corporation), the appraiser may request from the taxpayer any or all of (but not limited to) the following types of documents as evidence: proof of a homeowner's exemption on property, utility bills, vehicle registration, income tax returns, or property ownership records. Chapter 4 AH 577November 2003 24 C ERTIFICATED A IRCRAFT Certificated aircraft owned by a commercial air carrier are assessable as general aircraft if: " The aircraft is taken out of scheduled service and grounded in the county prior to the lien date, 40 and " The aircraft is not flown during the representative period, 41 and " The aircraft has an established tax situs in California and is solely situated in or habitually situated in the county on the lien date. 42 C HANGE OF S ITUS All aircraft currently on a county's assessment roll should remain so until written notice is provided to the assessor that the aircraft has established situs outside of the county. The burden of notification falls upon the taxpayer and, unless otherwise given notice, the assessor should enroll and assess an aircraft at its last known situs. If proper documentation for a new situs is provided, the aircraft assessment should then be cancelled via an assessment roll change. If a tax bill from another county is offered as evidence of a situs change, the assessor should request that the owner provide evidence that the bill has been paid, so as to ensure that the tax bill from the other county has not been cancelled. If an aircraft will be or has been moved to another county within California and the owner makes a written declaration of the fact, a copy of the declaration should be sent to the other county where the aircraft will gain its situs. If an aircraft is present in the county on the lien date and had tax situs in the county for one or more of the preceding assessment years, then it will have current taxable situs in the county even if removed prior to the start of the new fiscal year. 40 Section 1150 provides that while aircraft are in service and being operated by an air carrier, they are considered certificated aircraft. However, once they are taken out of service and grounded, they become general aircraft. 41 Section 1153. 42 Section 220 and Rule 138 provide an exception for aircraft solely in California to be repaired, overhauled, modified, or serviced. Chapter 5 AH 577November 2003 25 C HAPTER 5: E XEMPTIONS Certain provisions of the California Constitution allow for aircraft exemptions, either on a partial or full basis. The Constitution provides that the Legislature may classify any personal property for differential taxation or for exemption. 43 Personal property may be exempt from taxation by reason of its ownership, use, and/or type. Full exemptions include: " Aircraft considered inventory " Aircraft of historical significance " Aircraft in California for the sole purpose of being repaired, overhauled, modified, or serviced " Aircraft that have been made available for display in a publicly owned aerospace museum " Aircraft owned by the United States or foreign governments " Aircraft owned by the State of California or a political subdivision It is important for the appraiser to be aware of these exemptions in order to determine the ass

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