Major Airlines Take Off to L.A. Superior Court Seeking Property Tax Refunds

Several of the largest U.S. airlines, including American Airlines, United Airlines, Southwest Airlines and Airtran Airways, filed suit in the California Superior Court for Los Angeles County May 30 seeking over $7 million in property tax refunds for aircraft temporarily located at Los Angeles International Airport, Burbank Bob Hope Airport and Long Beach International Airport for the 2009 tax year. The dispute stemmed from how the airlines and the assessorscalculated economic obsolescence deductions.

Southwest and American alone seek refunds of $3.226 and $2.416 million, respectively, according to court documents on Bloomberg Law (available to subscribers).

In California, aircraft are valued based on the entire fleet rather than any individual airplane because of the transitory nature of air travel. A fleet’s value is apportioned to the state based on how long it has situs in the state, and is then further allocated within California by county. Fleets are valued at the lesser of market value as listed in a specified price guide, or by the original cost of the aircraft minus depreciation, which includes a mandatory deduction for economic obsolescence.

Economic obsolescence is the loss in utility and value caused by external influences separate from the property itself. For example, changes in regulatory requirements or low demand are examples of economic obsolescence.

The airlines claim that the Los Angeles and San Diego county assessors determined the proper valuation under the first part, using the specified pricing guide, but failed to follow the statutorily required procedures for calculating economic obsolescence under the second test. The economic obsolescence factors for airline fleet valuation in California include several detailed, airline-specific figures, such as annual net revenue per available seat mile, passenger load factor, and average revenue per revenue passenger mile.

The airlines argue that the L.A. County assessor misapplied these factors, consequently calculating a 0 percent obsolescence factor rather than 70 percent, the amount calculated by the airlines themselves. Because of this miscalculation, the airlines asserted that their fleets were taxed based on a value three times what it should have been.

The assessors have 30 days from the date they were served to file an answer.

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