For years, some California counties have been imposing disproportionately higher property tax rates on centrally assessed property despite the state constitutional mandate that this property be assessed like locally assessed property. In a challenge brought by centrally assessed utilities, the California Court of Appeal conceded that the higher property tax rates disproportionally burden utility company property but concluded that this disparity does not violate the California Constitution.

In County of Santa Clara v. Superior Court of Santa Clara County (AT&T Mobility LLC Real Parties in Interest), the California Court of Appeal, Sixth Appellate District, held that the mandate in Article XIII, section 19, of the California Constitution that centrally assessed utilities1 be subject to property taxation "to the same extent and in the same manner as other property" does not require imposition of the same tax rates as those imposed on locally assessed taxpayers.2 As a result, the court upheld the validity of Cal. Rev. and Tax. Code section 100, which imposes higher debt-service component tax rates on centrally assessed utilities than the debt-service component tax rates imposed on other taxpayers.3

The court's opinion was surprising. Not only did it overturn the trial court's rejection of the county's demurrer, but it dismissed the taxpayers' case without leave to amend, holding that the taxpayers failed to state a valid cause of action.4 Most practitioners anticipated the court would rule the centrally assessed utilities had at least stated a cause of action regarding whether section 100's seemingly discriminatory tax rates violated the constitutional mandate that centrally assessed utilities be subject to property tax "to the same extent and in the same manner" as non-centrally assessed properties. Indeed, the California Supreme Court's 1985 opinion in ITT World Communications concluded that Article XIII, section 19, requires centrally assessed utilities to receive the same property tax rates as non-centrally assessed property.5 But, the court of appeal dismissed this finding as dicta, ruling instead that the constitution does not require rate parity.6

Background

Before 1935, utilities were not subject to property taxation and instead were subject to state-imposed gross receipts taxes. That changed in 1935 with the adoption of the predecessor of Article XIII, section 19 (formerly Article XIII, section 14) and the associated implementing legislation extending California property taxes to utilities. These provisions stated that the assessed values of utilities would be determined on a statewide basis by the California State Board of Equalization.7 The BOE then allocated the unitary value of each company across the individual tax rate areas in the counties where the utility property was located, with each county then applying the appropriate tax rate to the BOE-allocated values. Utilities thus paid corresponding property tax at the same rate as all other real property in the same tax rate area.8 As noted, this new regime was governed by section 19, requiring that centrally assessed utility "property shall be subject to taxation to the same extent and in the same manner as other property."9

In 1978 California voters adopted Proposition 13 (Article XIII A of the California Constitution). Article XIII A, section 2 specified that the assessed values on real property determined by county assessors would be limited to the assessed values on the 1975-1976 tax roll, increased to reflect the fair market value as of any subsequent change in ownership, and increased for the value of any subsequently completed new construction, but with all other increases to assessed value limited to 2 percent annually.10 The ITT court concluded that the Proposition 13 assessed value limitations did not apply to centrally assessed utilities.11 The court concluded that Article XIII, section 19, required only that centrally assessed utilities be afforded the same property tax rates as noncentrally assessed property, and did not require that these utilities receive the benefits of Proposition 13's limits on assessed values. The court wrote:

By requiring that public utility property be "subject to taxation to the same extent and in the same manner as other property," article XIII, section 19, does not impose a requirement of equal valuation between public utility and other property, but simply specifies that public utility property, after it has been placed on the local rolls, be levied on at the same rate as locally assessed property, instead of being subject to a special gross receipts "in lieu" tax. In other words, this comparability requirement was not intended to apply to the valuation of public utility property, but only to its taxation after assessment. 12

To reduce the administrative burden for the BOE and for taxpayers, the Legislature adopted Cal. Rev. and Tax. Code section 98.9 (the predecessor to section 100) in 1987.13 It specified that each county shall have a single countywide property tax rate applied to the BOEdetermined countywide assessed values for centrally assessed utilities.14 Its current version, section 100, specifies that this countywide property tax rate is to be the sum of the standard 1 percent statewide property tax rate (without debt service (section 100(b)(1))), increased by a countywide debt service component tax rate to be determined, year-by-year, in accordance with section 100(b)(2).15 Section 100(b)(2) specifies that this debt-service tax rate for centrally assessed utilities would be the sum of the countywide debt-service tax rate for the prior year (section 100(b)(2)(A)) adjusted for the percentage change in the total dollars required for county debt servicing between the prior two years (section 100(b)(2)(B)).16

Section 100(b)(2)'s approach of adjusting the year-by-year countywide debt-service rate by the percentage change in the total dollars of countywide debt-service costs over the prior two years ignores that the countywide locally assessed secured property roll is usually increasing year by year, allowing the countywide debt-service costs to be spread across a greater denominator of assessed value each year.17 The mechanics of section 100 result in disproportionately higher debt-service component tax rates on centrally assessed utilities by first failing to account for the dilution of the debt-service tax rates caused by the normal year-over-year growth of total assessed values in each county, and then compounding this by continuously adding these disproportionate increases to the already inflated debt-service tax rate from the prior year. Indeed, the section 100 debt-service property tax rates for centrally assessed utilities in many counties are now many multiples higher than the debt-service property tax rates applied to non-centrally assessed properties.18 This disparity served as the foundation of the centrally assessed utilities' assertion that the section 100 formula can yield unconstitutional results.19

Notably, the bulk of the burden caused by section 100's higher debt-service property tax rates falls directly on California customers (the ratepayers) who receive services from cost-ofservice regulated utilities. This is because these rate-regulated utilities are allowed to recover expenses like property tax through utility rates. Thus, the court's opinion effectively condones section 100's shift of these disproportionately high property tax charges to customers of rateregulated utilities rather than having all public debt-service charges evenly allocated across both the locally assessed and centrally assessed property.

To view the full article click here

Footnotes

1. We have used the term "centrally assessed utilities" to identify privately owned public service companies subject to assessment by the California State Board of Equalization under Article XIII, section 19. Section 19 defines the companies and properties authorized to be assessed by the BOE as follows: "The Board shall annually assess (1) pipelines, flumes, canals, ditches, and aqueducts lying within 2 or more counties and (2) property, except franchises, owned or used by regulated railway, telegraph, or telephone companies, car companies operating on railways in the State, and companies transmitting or selling gas or electricity."

Cal. Rev. and Tax. Code section 100.9 provides that many centrally assessed electrical generation facilities, not owned by a regulated utility, are not subject to higher debt-service tax rates. Instead, these facilities are taxed on a situs basis in the tax rate area of the property's specific location, just like locally assessed taxpayers. Those properties remain unaffected by the appeals court opinion.

2. County of Santa Clara v. Superior Court of Santa Clara County (AT&T Mobility LLC Real Parties in Interest), No. H049161, 2023 WL 118623, at *12 (Cal. Ct. App. Jan. 6, 2023).

3. Id.

4. Id.

5. ITT World Communications Inc. v. City and County of San Francisco, 37 Cal. 3d 860, 870 (1985).

6. AT&T Mobility, No. H049161, 2023 WL 118623, at *12.

7. Cal. Const. Art. XIII, section 19.

8. Id.

9. Id.

10. Article XIII A, section 1(a), also placed a 1 percent limit on the annual property tax rate, with section 1(b) allowing the 1 percent limit to be increased for funding debt service on specific voter-approved public indebtedness.

11. ITT, 37 Cal. 3d at 870.

12. Id. (emphasis added).

13. Cal. A.B. 454 (1987), Cal. Stats. ch. 921, section 1.

14. Id.

15. Cal. Rev. & Tax. Code section 100.

16. Id. Structurally, section 100 established a "base year rate" based on the effective countywide average tax rate that the utilities had been paying in the final year of situs-based taxation, and then tried to annually index the growth of that tax rate only as much as debt service burden grew countywide.

17. The formula was succinctly described recently by the Ninth Circuit in BNSF Railway Co. v. County of Alameda, 7 F.4th 874, 881-882 (9th Cir. 2021):

Like section 93, section 100's first component is effectively a 1 percent general tax levy. Id. section 100(b)(1). Section 100's second component is also a debt service component, but it is calculated differently from section 93's. Section 100's debt service component is calculated as the previous year's unitary debt service rate, see id. Section 100(b)(2)(A), multiplied by the percentage change between the two preceding fiscal years in the county's ad valorem debt service levy (not rate) for the secured roll. Id. Section 100(b)(2)(B). The formula for the second component means that the unitary rate is based on the change in absolute dollars of the county's debt service rate, not changes in the percentage that taxpayers are paying. According to BNSF, it is this component that accounts for the divergence between the section 100 and section 93 rates. Specifically, if the tax rate applied to the secured roll increases, but the property values also rise, the section 93 rate will not rise. But the section 100 rate will increase because it is based on the increase in actual dollars of debt service tax paid.

18. See id. at 882.

19. AT&T Mobility, No. H049161, 2023 WL 118623, at *1.

Originally Published by tax notes state

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.