Property Tax Resources

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Supreme Court Rulings Help, Hurt Property Taxpayers

Two recent rulings by the California Supreme Court may have significant effects on the state's property taxpayers. These effects may be both good and bad, depending on your situation.

"The rule in question had watered down Proposition 13's cap on assessment increases by directly offsetting such increases against depreciation on machinery and equipment..."

The California Supreme Court issued two decisions in early August relating to property taxes that will significantly impact owners of commercial and industrial properties in Southern California.

Decision #1: Ruling Clarifies Tax Exemption for Intangibles

The first decision, Elk Hills Power vs. State Board of Equalization, broadly affirmed the exemption of intangible assets and rights from property taxation. County assessors had previously been assessing intangibles that businesses use in conjunction with real property as part of the real property's value. In other words, property owners were paying property tax on the value of the intangibles associated with operating businesses at a property, as well as on the value of the real estate.

The Elk Hills Power decision changes that by prohibiting assessors from including intangibles in the taxable value of the real property. Moreover, if a taxpayer identifies an intangible to the county assessor and shows the value of the intangible, the assessor must review it. So what are the intangibles that are exempted from taxation? The Supreme Court's decision lists several, including franchises, contracts, assembled workforce, customer base and goodwill.

That list is not comprehensive, however, and nearly all intangibles used in the operation of a business are arguably included. So how should property owners respond to the Supreme Court's taxpayer-friendly decision? First, identify the intangibles used in operating any business at the property and, if possible, attempt to value those intangibles.

Next, report the identified intangibles with associated values to the county assessor. This is especially important if the real property was recently acquired, which allows local assessors to establish new Proposition 13 base year values. If discussions with the assessor fail to result in exclusion and exemption of intangible values from the property tax assessment, the property owner should file and pursue an appeal before the county assessment appeals board.

Decision #2: Court Weakens Proposition 13's Cap on Tax Increases

The Supreme Court's second decision, Western States Petroleum Association vs. State Board of Equalization, involved the legality of a new rule issued by the State Board of Equalization for the taxation of petroleum refineries. The question before the court concerned a rule affecting Proposition 13, a law that essentially limits increases on the assessed value of land to no more than 2 percent annually.

The rule in question had watered down Proposition 13's cap on assessment increases by directly offsetting such increases against depreciation on machinery and equipment. For fixtureintensive properties like refineries, food processing facilities and power plants, the impact can be significant The Court struck down the rule, finding the Board had issued an inadequate economic impact report, and thereby failed to adhere to the requirements of the Administrative Procedures Act. In the same decision, however, the Court also ruled that the Board's reasons for adopting the rule were sound.

In fact, in a concurring opinion, one of the Court's justices essentially invited the Board to reissue the rule as long as it followed the procedures for doing so. It appears that the Board may be preparing to do just that. But this time the rule may be much broader in scope, sweeping in all types of properties that are operated with large amounts of machinery and equipment, which assessors refer to as "fixtures."

If the Board issues a more broad-ranging rule, commercial and industrial properties that use large amounts of fixtures will experience noticeable increases in property taxes. In essence, the Supreme Court's decision in Western States mounts to another attack on Proposition 13, much like the "split-roll" attacks that have sought to apply a tax rate to commercial properties that is different from the rate applied to residential properties. While it is possible that the Board will decline to revisit the matter, the current political and economic situation in California suggests it will enact another rule.

CONeallCris K. O'Neall, partner, Cahill, Davis & O'Neall LLP in Los Angeles. The law firm is the California member of American Property Tax Counsel. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..


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