BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 777 HEARING: 2/26/14
AUTHOR: Muratsuchi FISCAL: Yes
VERSION: 2/19/14 TAX LEVY: Yes
CONSULTANT: Grinnell
PROPERTY TAX EXEMPTION FOR SPACE FLIGHT PROPERTY
Enacts a property tax exemption for property used in space
flight.
Background and Existing Law
I. Personal Property Taxes. Section 1 of Article XIII of
the California Constitution provides that all property is
taxable unless explicitly exempted by the Constitution or
federal law. While the Constitution limits the maximum
amount of any ad valorem tax on real property at 1% of full
cash value, and precludes reassessment unless the property
is newly constructed or changes ownership, assessors value
personal property each year. The Constitution specifically
allows the Legislature to exempt personal property from the
property tax by 2/3 vote.
The Legislature has previously enacted such exemptions for
particular things, such as fruit trees, grapevines, and
personal property used exclusively at a zoo, as well as
categories, such as pets, personal effects, and household
furnishings. In 1980, the Legislature exempted all
business inventories from the property tax, defined as
items generally held for sale or lease in the ordinary
course of business.
II. Board of Equalization (BOE) and Assessors. In 1850,
the Legislature first directed county assessors to tax
property; however, assessors in different counties often
applied different tax rates and methods of assessment. The
California Constitution of 1879 created BOE to equalize
property tax rates and assessment practices among counties.
As part of its oversight role, BOE enacts rules and
regulations which generally bind county assessors; however,
assessors can disagree with BOE. If an assessor believes
that BOE's interpretation is invalid, he or she may bring a
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so-called "538 action" against BOE in court for declaratory
relief instead of applying BOE's rule or regulation.
Because BOE rules clarify current law, they generally apply
retroactively to any fiscal year within the statute of
limitations.
BOE Property Tax Rule 133 details the business inventory
exemption, including a list of items explicitly defined as
business inventory, such as containers, oak barrels used in
making wine and brandy, and crops and animals used in
production of food and fiber. The Rule states that
property used to deliver professional services such as law,
medicine, or architecture is taxable.
III. SpaceX. Founded by noted entrepreneur Elon Musk in
2002, Space Exploration Technologies Corporation (SpaceX)
constructs rockets that deliver satellites into space as
well as spacecraft that carries cargo to the International
Space Station. Headquartered in Hawthorne, CA, SpaceX is
the first private company to launch a rocket into orbit,
among other milestones, and plans to reuse its rockets
someday.
In 2012, the Los Angeles County Assessor audited SpaceX,
and noticed property in a site visit that wasn't listed in
its Business Property Statement, the form taxpayers use to
self-report personal property to the Assessor. In February
2013, Los Angeles County issued SpaceX an assessment for
that property for all years within the statute of
limitations, back to the 2007-08 fiscal year. SpaceX
appealed the assessment to the Los Angeles County
Assessment Appeals Board. The County Clerk has not yet
scheduled the appeal for hearing.
In addition to the appeal, SpaceX is seeking regulatory
change from BOE, which issued an advisory, non-binding
opinion in December, 2013, stating that SpaceX's equipment
qualifies for the inventory exemption. Additionally, BOE
initiated a discussion of proposed revisions to Rule 133 to
add specified space flight property to its list of items
explicitly defined as exempt business inventory.
SpaceX wants space flight property exempted from the
personal property tax by statute.
Proposed Law
AB 777 - 2/19/14 -- Page 3
Assembly Bill 777 exempts from the property tax tangible
personal property that has space flight capacity. Property
exempted by the bill includes raw materials, works in
progress, finished goods, and includes orbital space
facilities, space propulsion systems, space vehicles,
launch vehicles, satellites, or space stations of any kind.
Fuel sold and used exclusively in space flight is also
exempt if it is not adaptable for use in ordinary motor
vehicles. The property need not be returned to Earth to
qualify for the exemption.
The taxpayer must provide evidence that the exempt property
meets the bill's definition upon the assessor's request.
The Assessor cannot deny the exemption for reason of launch
failure, postponement, or cancellation. The bill states
that the exemption does not apply to any material that is
not intended to be launched into space. Only taxpayers
that have a primary business purpose in space flight
activities are eligible for the exemption.
The exemption applies to lien dates between January 1, 2014
and January 1, 2024, and sunsets on July 1, 2025. The
measure also states that no inference be drawn from the
bill's changes to the law to ensure that the bill does not
affect SpaceX's current appeals.
State Revenue Impact
BOE estimates state revenue losses of $1.1 million
resulting from the 8/26/13 version of AB 777. While a
revised estimate is pending, committee staff does not
expect the amendments to change the previous estimate
significantly.
Comments
1. Purpose of the bill . According to the author, "Space
exploration, until very recently, was an entirely
government run industry. However, in recent years,
California has seen the emergence of private space
companies that put our state at the forefront of innovation
and technology. These private companies are not only
creating the most advanced space vehicles, but are also
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significantly contributing to the state's economy and our
local communities. Despite the ground-breaking advances
made by the aerospace industry, California has yet to adapt
modern tax policies that reflect the realities of this
burgeoning sector. Recently, the Los Angeles County
Assessor stated that propulsion systems - rockets used for
space travel - are considered "business supplies" and are
therefore subject to property tax. Space X, for example,
recently received a $2 million tax bill for the storage of
two propulsion systems. However, rockets should not be
considered business supplies as they are a part of a
transportation service provided, and are lost or destroyed
in orbit after launch and do not return to Earth.
Previously, these propulsion systems have never been taxed
and represent a significant cost for the space industry,
because they are only used once. Nevertheless, these
unexpected enormous tax liabilities represent a devastating
cost for this important California industry and could
potentially cause businesses and jobs to leave the state."
2. To boldly go . According to news reports, SpaceX is the
first private company to launch space vehicles, a result of
the National Aeronautics and Space Administration (NASA)
shifting from directly funding space exploration to a new
model of doing so through private firms. Because NASA is
part of the federal government, any rockets it owns would
be exempt from the property tax, but SpaceX must pay them
as any other private entity would. However, why should
SpaceX's personal property used in space flight be exempt
from the tax that applies to all other firms, as called for
by AB 777? Exempting one kind of business may prompt other
industries to ask for similar treatment. Additionally,
other firms that provide products and services factor in
the cost of taxes as part of negotiating contracts: a
trucking company must pay vehicle license fees (an in-lieu
personal property tax) on its tractor trailers, private
railroad car owners must pay the private railroad car tax,
and air cargo carriers landing in California pay personal
property tax on its planes. Each firm factors the costs of
taxes when bidding for jobs, just as SpaceX's costs of its
taxes should be embedded within the price it charges to
NASA and other firms for its services. While SpaceX is
clearly doing innovative things, what are the reasons to
exempt SpaceX's delivery vehicles, but not the others? All
these firms basically deliver cargo for money; only the
vehicles and routes are different. The Committee may wish
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to consider the precedent created by the bill, as well as
the justification for exempting one category of property
from a tax designed to apply equally to all taxpayers.
3. Something different . Property tax statutes in
California are old, and for the most part, haven't kept
pace with a rapidly evolving California economy. For
example, California's statute that describes storage media
for computer programs, last amended in 1973, refers to
punched cards, tapes, discs or drums. Antiquated statutes
like the above example cause disagreements between
taxpayers and assessors when modern businesses make
products or provide services that don't fit neatly into the
old legal boxes. AB 777 presents such a case. SpaceX and
the Assessor disagree regarding whether today's rockets
that are consumed as part of delivery are either taxable
business supplies or tax exempt business inventories, but
if the firm can make reusable rockets, they look more like
taxable cargo delivery vehicles from the above example.
Given the increasing rate of change in today's modern
California economy, AB 777 presents an opportunity to
provide valuable certainty to both assessors and taxpayers
that regardless of how the business model of the space
flight industry develops, the property used in space flight
isn't taxable.
4. Reverse thrust . AB 777 exempts space flight property
from the property tax, beginning with the January 1, 2014
lien date for the 2014-15 fiscal year. As such, SpaceX's
property tax appeals to assessments for previous tax years
will be adjudicated based on the law in place at the time
the assessor issued the assessment, because the measure
doesn't change the law retroactively, and contains
direction not to consider the bill when adjudicating
appeals. However, the rules that the assessment appeals
board will apply to the appeal may change. BOE may change
Property Tax Rule 133 to state that space flight property
is an exempt business inventory, a change that would apply
retroactively. If BOE changes Rule 133 in such a way, the
assessor may bring a 538 action against the BOE if he or
she believes its change to Rule 133 is invalid. If the
assessor does not bring a 538 action, or if the court finds
BOE's rule valid, the assessment appeals board will then
consider SpaceX's appeals in light of BOE's rule change.
5. Solo mission ? While SpaceX is currently the sole
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provider of private space flight at commercial scale, they
may not be alone for long. News reports indicate that
Google recently submitted a proposal to NASA to use a
hangar at Moffet Federal Airfield near Mountain View, CA
for new robots, planetary rovers and other space or
aviation technology. Additionally, Sir Richard Branson's
Virgin Galactic's SpaceShip Two space planes used its
rocket engines for the first time in a test flight out of
California's Mojave Air and Spaceport in April, 2013.
6. Vote key . Generally, when the Committee considers a
measure in which Legislative Counsel has keyed the measure
a 2/3 vote, it means that the bill increases state taxes,
but AB 777 doesn't. Instead, the measure contains the
higher vote threshold because the Constitution explicitly
authorizes the Legislature to exempt personal property from
the property tax, but only by a 2/3 vote.
Assembly Actions
Assembly Floor 69 - 5
Assembly Appropriations 16 - 0
Assembly Revenue and Taxation 7 - 0
Assembly Rules 9 - 0
AB 777 - 2/19/14 -- Page 7
Support and Opposition (02/19/14)
Support : California Board of Equalization Chairman Jerome
E. Horton; Aerojet Rocketdyne; California Chamber of
Commerce; California Unmanned Aircraft System; City of
Hawthorne; Commercial Space Flight Federation; El Camino
Community College District; Los Angeles Area Chamber of
Commerce; Los Angeles County Economic Development
Corporation; Mojave Air and Space Port; Northrop Grumman
Aerospace Systems; Palos Verdes Peninsula Chamber of
Commerce; South Bay Association of Chambers of Commerce;
SpaceX; the Aerospace and Defense Forum, Torrance Area
Chamber of Commerce.
Opposition : Santa Clara County Assessor Larry Stone.