This state's current property tax system is unique among all California taxes. The end of the protest period expires before you receive your tax bill. You may not know the basis for the assessment before having to file a protest, but it's unclear whether you can amend your petition. You have to begin paying your property tax bill by December, even if your appeal is not heard by then.
Once you get to a hearing, the same attorney's office represents the assessor and the assessment appeals board. Once the hearing is over, the board can sit forever without issuing findings of fact. The board can require that you submit proposed findings of fact, then charge you for having county counsel reformat them.
If you win, the assessor can come back next year on the very same issue and try again. And, once the assessor wins at the local level, the courts are prohibited from taking any new evidence on factual issues. It's a miracle that any taxpayer can prevail against an incorrect assessment in this biased system.
SB 1903 (Maddy), sponsored by Cal-Tax, contains property tax administration reforms intended to create a more even playing field for property tax administrators and property taxpayers. It is a compilation of reforms to clarify existing law, codify case law and assure uniform and fair application of property tax law throughout the state. These issues were identified as high priorities for taxpayers at a Cal-Tax symposium in November 1995, and attended by more than 125 persons representing a cross section of California property taxpayers.
SB 1903 proposes balancing reforms in four areas:
Under current law, property taxpayers are entitled to an administrative hearing on contested taxes after timely filing of an application for reduction. In general, the total amount of property tax assessed must be paid by the delinquency date or the taxpayer is subject to penalties and interest on the full amount. For other tax disputes, such as sales tax and income tax, taxpayers have the right to an administrative hearing prior to payment of taxes in dispute.
A county tax collector may accept a partial payment of property tax with approval of the board of supervisors. A taxpayer also has the option of letting secured roll (land and buildings) property taxes go delinquent, with a five-year period to pay overdue taxes, penalties and interest before a tax sale of the property can occur. Unsecured roll (personal property) tax collection procedures for unpaid taxes are considerably more onerous (e.g., immediate seizure of property).
Problem
When a taxpayer appeals a property tax assessment and pays the entire amount of the assessment, payment of the overassessment can cause a considerable hardship on a taxpayer's cash flow - perhaps causing deferral of new investment, layoffs, etc.
The other option is not particularly attractive, either. A taxpayer who allows taxes to become delinquent must pay penalties and interest on the total amount, not just the taxes in dispute. It is also not in a county's best interest if a taxpayer goes delinquent on property taxes as the county loses cash flow on amounts that would otherwise be paid. Even when partial payment is allowed by a board of supervisors, the taxpayer still faces penalties and interest.
The current system can also cause cash flow problems for local jurisdictions when large refunds are due taxpayers. Counties are not required to impound taxes in dispute, so if a taxpayer prevails, but the county has already allocated the tax revenue to local jurisdictions, the county must recover the amount of the overassessment. If this money has already been budgeted and spent, it can create short-term and long-term instability and uncertainty for jurisdictions receiving misassessed property tax revenue.
Solution
SB 1903 would allow property taxpayers to defer payment on amounts of tax in dispute until an administrative hearing issues a determination. In order to defer payment of taxes in dispute, SB 1903 would require a taxpayer to pay at least the same amount of taxes paid in the prior year. This process would be fairer for taxpayers and local jurisdictions. It relieves taxpayers from outlays of large sums of money which may eventually be refunded and removes the risk for local jurisdictions when large refunds are due taxpayers. It protects local jurisdictions' cash flow by requiring the taxpayer to pay at least the prior year's tax amount. It would also give property taxpayers the right to an administrative hearing without paying taxes in dispute. This is a right which sales and income taxpayers already have.
2. Assessment Appeal Amendments
Background
Current California law requires an assessment appeal (referred to in law as an application for reduction in an assessment) to be filed within the time period beginning July 2 and continuing through September 15. In the application the taxpayer must indicate an opinion of property value.
Problem
The local assessment roll is required to be completed by county assessors on July 1. This deadline can be extended to August 1, meaning taxpayers do not have access to their assessed value until that time. This short time span between roll completion and September 15 leaves insufficient time for taxpayers to complete a full appraisal of property value. Taxpayers are forced to submit an estimated opinion of value. Statutory law is silent regarding a taxpayer's ability to amend a timely filed application in order to revise their opinion of value, but State Board of Equalization Rule 305(e) prohibits certain, but not all, amendments after September 15. Other types of taxes (e.g., sales and use, bank and corporation and personal income taxes) allow amendment of timely filed appeals. Some county appeals board clerks do not allow a taxpayer to amend an appeal. This creates unnecessary confusion and extra work as the taxpayer and assessor prepare for the appeal hearing using a less accurate taxpayer opinion of value.
Solution
SB 1903 would allow taxpayers to amend a timely filed application after the filing deadline has passed. This would clarify a taxpayer's right to amend an appeal, streamline the appeals process and conform with other types of tax appeals.
3. Separate Legal Counsel
Background
Current law allows the county counsel's office to represent both the assessor and the assessment appeals board (AAB) in a property tax appeal, as long as the same person does not represent both parties. This is also the same counsel's office that represents the board of supervisors.
Problem
Having the county counsel's office represent the assessor and the assessment appeals board creates a huge conflict of interest, similar to a prosecutor also being a judge's law clerk. A further conflict exists with property tax appeals of significant monetary value which can cause inappropriate consideration of the revenue impact by a county counsel's office interested in protecting county revenue, rather than acting to determine the correct property value.
Solution
SB 1903 would prohibit county counsel from representing both the assessor and the assessment appeals board.
4. Stipulations
Background
Under current law, a taxpayer and the assessor may agree to the value of a property on appeal and submit such a stipulation to an appeals board for acceptance or rejection. If rejected, the board is required to set the matter for a hearing.
Problem
Current law does not set forth a time frame for action by appeals boards on stipulations. They can just sit on them. Further, if rejected, the appeals board does not have to say why.
Solution
SB 1903 would require assessment appeals boards to act on stipulations in 60 days. It also would require AABs to explain why stipulations are rejected.
5. Findings of Fact
Background
Assessment appeals boards must provide written findings of fact (disclosing the board's determination of all material points raised) if so requested by a party to an assessment dispute. The request must be made prior to the equalization hearing. Counties may charge a "reasonable" fee for this service.
Problem
There is no deadline for the issuance of findings of fact. In some instances, there have been inordinate delays. Such delays are harmful to the party that may wish to appeal the decision of the assessment appeals board.
Solution
To encourage prompt issuance of findings of fact, SB 1903 would provide that if findings of fact are not issued within 45 days, the party requesting such findings shall not have to pay the fee.
6. Collateral Estoppel
Background
Collateral estoppel forecloses relitigation of an issue that (1) is identical to one decided in a prior case, (2) involves the same party or parties and (3) resulted in a final judgment on the merit. The doctrine is prompted by considerations of judicial economy.
Problem
County assessors often raise the same issues in assessment appeals board proceedings which were decided in earlier year proceedings. This results in redundant litigation and greatly increases the cost to taxpayers of relitigating issues over and over again when the only thing that has changed is the year in issue.
The Second District Court of Appeal in County of Los Angeles v. County of Los Angeles Assessment Appeals Board No. 1 (1993) clearly stated collateral estoppel is available in property tax assessment appeals. The court said, "There is no impediment to applying collateral estoppel ... to its full reach in this litigation. The superior court properly invoked its prior judgment to resolve adversely to the County the issue of the extent of the rent-a-cars' possessory interests at LAX for the tax years here in issue."
Solution
SB 1903 would add a provision to the Revenue and Taxation Code to codify the above court decision that collateral estoppel can be used in assessment appeals.
7. Trial de Novo for Local Assessees
Background
Current law allows state assessed taxpayers the right of a trial de novo on questions of valuation in court. Locally assessed taxpayers do not have such a right. A trial de novo is a proceeding in court where the trial court is not limited to the administrative record on questions of value but shall consider all evidence of value admissible under the rules of evidence.
Problem
For local taxpayers, appeals of determination of a county property tax appeals board are generally restricted to challenges of the validity of a valuation method or to an issue of law. The local appeals process is often unsatisfactory because appeals boards limit time to present evidence, are advised by county counsel and sometimes lack expertise in complicated cases.
Solution
SB 1903 would authorize a trial de novo for local tax appeals. This change in law would give taxpayers their day in court, assure a full hearing of evidence from taxpayers, eliminate the need to consider unclear distinctions between fact and law questions, and treat locally assessed property taxpayers the same as state-assessed taxpayers.
8. Possessory Interest Exclusive Use
Background
Current law and judicial precedent hold that a taxable possessory interest exists if an assessor finds a private use of public property to be durable, independent and exclusive. Current law delineates six categories of conditions which are presumptively "exclusive." These are sole occupancy; use as a cotenant; concurrent uses with primary or prevailing right of use, by persons making qualitatively different uses, or by persons engaged in similar use that diminish the quality or quantity of property; and general concurrent use if the number of concurrent uses are restricted. Any other use that does not contain one of these six elements is rebuttably presumed to be non-exclusive.
Problem
Current law is not clear regarding the evidentiary standard the assessor must carry when a taxpayer appeals an assessor's finding of exclusivity giving rise to a possessory interest.
Solution
SB 1903 would provide that assessors must meet the evidentiary standard of "preponderance of the evidence" to overcome the presumption in current law that the use is non-exclusive.
9. Possessory Interest Legal Costs
Background
Local assessors value most property by directly comparing the sales price of similar properties. Most possessory interests, however, cannot be valued by direct comparison because most possessory interests are not sold in a market transaction. To assess a possessory interest, assessors often use indirect methods for estimating value. These methods can rely on subjective judgments by the assessor.
In addition, in most circumstances, the assessor has a presumption of correctness when valuing property.
Problem
The subjective nature of possessory interest assessment has resulted in a number of over assessments. Upon appeal, these assessments have been reduced. For example, four significant possessory interest lawsuits on intangibles reached the appellate court level in 1993 and 1994. All were decided in favor of taxpayers.
Moreover, the subjective standard when combined with the assessor's presumption of correctness has made possessory interest assessments highly contested and contentious. Legal costs for taxpayers to achieve fair assessments are significant.
Solution
SB 1903 would provide that if a taxpayer prevails over an assessor's possessory interest value at the appellate court level, the county must reimburse the taxpayer for actual and reasonable litigation costs. This cost shift is intended to:
1. Discourage the use of tax theories that determine high possessory interest values which, upon appeal, are ruled invalid.
2. Re-balance the property tax system by giving the taxpayer a minor counter-balance in possessory interest valuations to the assessor's major presumption of correctness.
3. Encourage the development of a more uniform standard of assessment across counties.
Taxpayers may appeal a property tax assessment by timely filing an application with the county assessment appeals board clerk. Current law requires specified information on an application, including the name and mailing address of the taxpayer, the parcel number and property address, the current assessment and the taxpayer's opinion of value, the appeal period and the reason for appealing the assessment.
Problem
Many taxpayers file appeals on more than one piece of property. In many cases the issues for appeal are the same for each parcel. Some county assessment appeals boards do not allow a taxpayer to consolidate these appeals into one hearing. This unnecessarily requires more hearings, involving more time for both the taxpayer and appeals boards. The law is silent regarding a taxpayer's right to have a consolidated appeals hearing.
Solution
SB 1903 would allow a taxpayer to consolidate appeals hearings of separate parcels where the issues in dispute are the same. This would clarify a taxpayer's right to consolidate appeals hearings and streamline the appeals process.
2. Market Data Comparables
Background
When assessing property for property tax purposes, the preferable and most reliable indicator of value is an arm's-length sale of the subject property or comparable property. In order to find a reliable value as of the lien date, sales have to be near the lien date due to market fluctuations. Current law (Sec. 402.5 of the Revenue and Taxation Code) prohibits use as a comparable sale, any sales occurring 90 days after the lien date.
Problem
With the slow real estate market in California in recent years, it has been difficult to gather enough comparable sales that fall within the 90-day window.
Solution
SB 1903 allows the use of sales occurring 180 days after the lien date, provided the value is indexed back to the lien date. This expands the pool of market data for use in the appraisal of property, but protects taxpayers from being subject to an inflationary price six months after the valuation date.
3. Personal Property Statements
Background
Current law (Sec. 441 of the Revenue and Taxation Code) requires taxpayers with $100,000 or more of personal property to file an annual property statement each year with the assessor. (For the first year, the threshold is $30,000.)
Problem
Compliance costs with respect to the personal property tax are significant, leading some to advocate repeal of the tax altogether. Other states with a personal property tax allow taxpayers to file a statement showing only additions and deletions of personal property reported in the previous year to simplify administration and relieve compliance burden.
Solution
SB 1903 would allow taxpayers to elect to file property statements containing only additions and deletions from the prior year. Only taxpayers who had timely filed a property statement in compliance with all requirements in the preceding year would be eligible to choose this reduced filing option.
4. Step Transactions
Background
Pursuant to Proposition 13, property is reappraised to full value upon a "change of ownership." Statutory implementation defines the term change of ownership and sets forth a number of examples of transactions that are not changes of ownership.
The statute does not provide for a step transaction doctrine where a series of non-reassessable transfers might be combined into a reassessable change of ownership. Nevertheless, the Second District Court of Appeal, in Shuwa Investments Corporation v. County of Los Angeles (1991), ruled that the application of the "step transaction doctrine" is applicable in determining change of ownership. This doctrine was developed and is primarily utilized in federal courts. The court applied the theory to change of ownership in the Shuwa case.
Problem
Because the statues on change of ownership do not mention step transactions, taxpayers are given no guidance or warning that a series of transactions might trigger a change-of-ownership reassessment. Further, the decision has created great uncertainty about the normal multiple changes of ownership that may occur over a long period of time under normal business practices.
Solution
To warn taxpayers of this step transaction doctrine, SB 1903 would codify the holding in Shuwa. To end uncertainty that is clouding normal business practices, SB 1903 establishes a safe harbor of six months. If the multiple transactions take longer than six months, it will not be considered a step transaction. Six months is a reasonable time for a taxpayer to hold a property, subject to the uncertainties of the market, to avoid possible step transactions liability.
In the Shuwa decision, the court said in describing the test for determining a step transaction: "Unfortunately, these tests are notably abstruse - even for such an abstruse field as tax law."
Taxpayers should not be at risk indefinitely under an abstruse concept foreign to California tax law.
Current law allows homeowners an exemption of $7,000 in value for property tax purposes on their principal place of residence. Applications for the exemption are a public record and properties with the exemption are identified on the roll.
Problem
There is no good reason for this exemption to be shown on the roll, and without any compelling reason, the requirement violates the California Constitution's Art. I, Sec. 1 right to privacy.
Further, some individuals are using the homeowners exemption designation to develop mailing lists. They then mail letters to homeowners soliciting applications for property tax assessment reductions. In some cases taxpayers are asked to send in money for an appeal to be filed on their behalf, and get only a blank appeals application to be filled out and filed. In other cases, inappropriate appeals have begun flooded appeals offices.
Solution
SB 1903 would provide that the homeowners' exemption not be shown on the county property tax roll.
2. Trade Secrets
Background
Current law authorizes a closed session of an assessment appeals board to hear evidence relating to trade secrets that have an impact on the value of property.
Problem
Although a closed hearing to hear trade secrets is authorized, there is no provision in law that requires anyone at the hearing to keep the information confidential. As a result, some taxpayers have been reluctant to present information relating to trade secrets at an appeal. Taxpayers should not have to make trade secrets public in order to have a fair assessment.
Solution
SB 1903 would require persons privy to confidential information at assessment appeals hearings to keep such information confidential. These requirements are the same as personal income tax confidentiality.
Current California law requires, in general, that property be assessed at fair market value, consistent with Proposition 13's limits on annual assessment growth. In some cases, county assessors have tried to assess property at higher than fair market value, under the theory that use of the property is more valuable to the owner. This concept of "value in use" has been rejected by the courts in Pacific Mutual Life Insurance Company v. County of Orange (1985) and Hughes Aircraft Company v. County of Los Angeles (1994).
In the Hughes case, Los Angeles County argued, "If you can say that the highest and best use of a property is to use it then the proper value would be the value to the user." The Second District Court of Appeal, in rejecting the value-in-use theory said, "The County erred by valuing the Hughes property at its value to Hughes, rather than attempting to value the property at fair market value or by a hypothetical sale in the market."
Problem
Despite the ruling in Pacific Mutual, Los Angeles County persisted in using the invalid value-in-use theory to value Hughes' property in 1993. Additionally, the value-in-use theory still has other adherents. The staff of the State Board of Equalization advised Sonoma County in 1995 that it should be enrolling the cost to install swimming pools added by homeowners, akin to using the value-in-use theory. It is common knowledge that when a swimming pool is added to a property, the value of the property on the open market for sale does not increase by the cost of putting in the swimming pool. It is substantially less.
Solution
To bring further clarity to this issue and stop further illegal assessments and unnecessary litigation, SB 1903 would codify the Pacific Mutual and Hughes decisions prohibiting assessment officials from using value in use as an assessment method.
2. Contaminated Property Valuation
Background
California law requires property to be assessed at its fair market value, subject to the limitations of Proposition 13. For contaminated property this means the amount a willing buyer would pay a willing seller for such property on the lien date.
In Firestone Tire and Rubber Company v. County of Monterey (1990), the Sixth District Court of Appeal rejected the assessor's argument that pollution cleanup costs do not affect a property's fair market value. The court said:
"The county's argument is unpersuasive, however. Pollution is not akin to the private deed restrictions in Carlson, or to the below-market rental agreement in Clayton v. County of Los Angeles (1972) 26 Cal.App.3d 390. The contamination did not restrict Firestone's use and disposition of its property before the plant closed. Whether toxic clean-up costs represent property damage or equitable remedies, or as the county also argues, damage to third parties or damage to public rights, and notwithstanding that they are legal obligations resulting from corporate conduct, the salient question remains whether the contamination affected the fair market value of the property, and if so, to what extent."
Problem
Taxpayers do not believe that there is sufficient clarity in the statute on how contaminated property is to be assessed. As the court said in the Firestone decision, the value is determined based on what extent, if any, the contamination affected the fair market value of the property.
Solution
SB 1903 provides statutory guidelines that contaminated property is to be valued on the basis of the price the property would bring in an open market transaction on the lien date, consistent with the Firestone decision.
The bill further provides that assessors may not increase the value of any property, whether contaminated or not, based on a donation of money to government for mitigating project impacts, if the donation does not result in the addition of tangible property at the project site.
3. Possessory Interest Valuation
Background
Possessory interests are difficult to value for purposes of property taxation. To assist assessors in determining value, the State Board of Equalization adopted Board Rule 25 in 1971.
Since the rule was adopted, a series of California court decisions have revised and adapted the assessment of property. The private use of public property giving rise to a possessory interest has also evolved since adoption of Rule 25.
Problem
Rule 25 has not been changed to reflect the 25 years of judicial decisions and changes in the tax environment.
Solution
SB 1903 would update and codify Rule 25 to provide taxpayers and assessors with a reliable body of law regarding the valuation of possessory interests. Clarifications include:
1. A declaration that "value in use" is an invalid assessment standard, as determined in California appellate court cases.
2. A requirement that the assessor use an objective measure of value, rather than measure the property's value to a particular property owner. This is consistent with the constitutionally required standard of fair market value.
3. A prohibition from assessors imputing enterprise value (such as business acumen or marketing advantages) in the value of real property.
4. A requirement that the assessor disclose to the taxpayer the calculations used when making an assessment, as required by appellate court decisions.
5. A prohibition on using the "cost method" exclusively.
6. Provisions shifting the burden of proof when the assessor has failed to document adequately his or her calculations.
4. Possessory Interest Renewals and Subleases
Background
A possessory interest is a private interest in tax-exempt land (e.g., land leased from a government entity). Possessory interests are considered real property and assessed as real property under Proposition 13, which provides that acquisition value is used and property is reassessed only when it changes ownership or is newly constructed. When a possessory interest is renewed by the same party, current law requires a change-of-ownership reassessment. When a possessory interest is subleased, there is also a change-of-ownership reassessment.
Problem
The change-of-ownership provisions applicable to possessory interests are unfair and treat possessory interests much harsher than real property changes of ownership. Two major problems are:
1. Short-term contracts for government property are subject to frequent change of ownerships, but in valuing such properties, assessors assume that the contracts will be renewed and the lessee will possess the property for substantially longer than the contract period.
2. All subleases of possessory interest property are treated as changes of ownership while sub-leases of real property for a period of less than 35 years are not reassessable.
Solution
1. To remedy the unfairness of assessing short-term possessory interests as if they were long term, SB 1903 would provide that there would be no change-of-ownership reassessment during the estimated period of possession upon which the original assessment is based, providing the same party renews the possessory interest. Alternatively, statute could also be clarified to provide that the change-of-ownership reassessment could be made at the expiration of a short-term lease, but in such an event the assessor must value it as a short-term lease and not a long-term lease.
This would insure the taxpayer is not hit twice - once for a higher value due to an assumed long-term possessory interest, and once through a change-of-ownership reassessment at every point of renewal of a short-term lease. For example, if a possessory interest has a one-year term but is being assessed as if it had a five-year term of possession, SB 1903 would provide that a new valuation based on a change of ownership could only be made at the end of the fifth year.
2. For subleases of possessory interests, SB 1903 would apply the same standard for subleases of real property, that a sublease of 35 years or less is not a change of ownership.
5. Transportation Corridors
Background
A possessory interest is a private interest in tax-exempt land. State Board of Equalization Property Tax Rule 21 requires that there must be an exclusive use for a possessory interest to exist, but allows certain multiple uses not inconsistent with exclusive use.
Problem
From its origins as a lease of government property or the right to remove minerals from public lands, the possessory interest has been expansively and aggressively interpreted by some local assessors, and state board staff in advising assessors, to include virtually any private use of public land for a profit.
For example, the Los Angeles County Assessor's Office is still trying to assess an airport van service for allegedly having a possessory interest in World Way, the public street surrounding the airport. An assessment appeals board rejected the county's position, but the county has gone to court to attempt to reverse the decision.
Similar problems have been experienced by the airline industry.
Transportation corridors, used for transportation purposes, are open to all comers and no one has an exclusive use that would merit the charging of a possessory interest tax for the use of public streets and highways and other transportation venues.
Solution
SB 1903 would establish a conclusive presumption that transportation corridors used by the public do not meet the required "exclusive" use requirement of statute and therefore do not give rise to a possessory interest.
6. Lien Date Change Postponement
Background
Currently, locally assessed property is valued for property tax purposes on March 1. Last year, SB 327 (Campbell) was approved changing the lien date to January 1, beginning in 1997.
Driving the change in the lien date was the fact that few, if any, businesses have a fiscal year or even a quarter which ends on February 28; consequently, it is expensive and inaccurate to separately account for property acquired and disposed of in the "stub period" between the end of the businesses' fiscal year and March 1. Also, the lien date for state-assessed property is January 1 and this creates an inequity between state-assessed non-unitary property and locally assessed property if the lien dates are different.
Problem
Despite the fact that the Legislature gave county assessors 15 months to implement the lien date change to January 1, a number of assessors have come forward recently saying 15 months is not enough time to change their systems to a new date. Some have asked for one more year; others have asked for two years.
Taxpayers are very reluctant to postpone the change in the lien date at all. Attempts to change the lien date have been taking place for at least 30 years. (In 1965, the Petris-Unruh comprehensive tax reform plan would have changed the lien date to January 1. The bill passed the Assembly but was defeated in the Senate.) Taxpayers have concerns that once an implementation date is postponed, it is easy to keep postponing it. In addition, taxpayers will lose the benefits of the January 1 date for another year and some have already incurred costs to implement the change.
Solution
In the spirit of compromise, SB 1903 would postpone the January 1 lien date for one year to 1998. Because taxpayers will be foregoing a considerable benefit, they are only willing to give up such a benefit in the context of an overall property tax reform package that includes other benefits, such as trial de novo for local assessees.