COUNTY OF SAN MATEO

Inter-Departmental Correspondence

County Counsel

DATE:

September 21, 2004

BOARD MEETING DATE:

October 19, 2004

TO:

Honorable Board of Supervisors

FROM:

County Counsel

SUBJECT:

Claim for Property Tax Refund Submitted by Southwest Airlines Co. (Commercial Aircraft, APN 092-030-010 and Account No. 049084-02-N)

Recommendation

Deny the claim of Southwest Airlines Co. (“Southwest”) for a refund of $55,806.35 in property taxes paid in the 2000-2001 tax year for commercial aircraft operated in San Mateo County.

Background

Southwest has submitted a claim for a refund of a portion of the property taxes that it paid on its fleet of commercial aircraft operated in San Mateo County during the 2000-2001 tax year. Southwest claims that its costs associated with software embedded in its aircraft are not taxable and that it is entitled to a property tax refund to the extent that the assessed value of its aircraft reflects the cost of this software.

Discussion

For many years, commercial airlines and assessors throughout the State disagreed about, among other things, whether software embedded in commercial aircraft was assessable and subject to property taxation. In the late 1990s, airlines and the assessors entered into an agreement that was codified at section 401.15 of the Revenue & Taxation Code, which settled numerous outstanding issues related to the assessment of commercial aircraft.

Section 401.15 mandates that assessors are to use the “original cost” of the aircraft to determine fair market value. “Original cost” is the “[t]axpayer’s cost for that individual aircraft reported in accordance with generally accepted accounting principles . . . and to the extent not included in the taxpayer’s cost, transportation costs and capitalized interest and the cost of any capital addition or modification.” Notably, no provision is made in the Revenue & Taxation Code for excluding from “original cost” the expenses attributable to software included in the aircraft’s various components.

Further, it is axiomatic that the “identification of the property to be appraised is an integral part of the appraisal process.” Assessors’ Handbook § 501, Basic Appraisal, Sept. 1997, at 10. In this regard, the California State Board of Equalization has stated that “the proper unit to be valued is the unit that people in the market typically buy and sell.” Id. The appraisal unit relevant here that people in the market typically buy and sell is that of an aircraft, along with all of its avionics and related electronics. The market does not value Southwest’s aircraft in any way that segregates the value of the various computer programs that may be contained in the aircrafts’ computers. It follows that the Assessor properly assessed each of Southwest’s aircraft as a unit and that Southwest is not entitled to exclude its aircrafts’ software from property tax assessment.

Vision Alignment

The recommended action furthers the County’s commitment to responsive, effective and collaborative government and the goal of ensuring that County decisions be based on careful consideration of future impact, rather than temporary relief or immediate gain.

Fiscal Impact

No fiscal impact is anticipated, unless the claim for refund is granted.