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The California Constitution authorizes the Legislature to classify personal property for differential taxation or for exemption by means of a statute approved by a ²/₃ vote of the membership of each house. Under the Private Railroad Car Tax Law, the State Board of Equalization assesses and taxes private railroad cars operated upon railroads in this state. In making an assessment, the board is required to determine the average number of each class of private railroad cars physically present in the state in the calendar year immediately preceding the fiscal year in which the tax is imposed upon the basis of car days.

This bill would, commencing with the 201819 fiscal year and for each fiscal year thereafter, instead require the board, in making the assessment, to determine the physical presence of private railroad cars in the state in the calendar year immediately preceding the fiscal year in which the tax is imposed upon the basis of mileage. For assessments for the 201718 fiscal year, the bill would require the board to determine the physical presence of private railroad cars for the 2016 calendar year on the basis of both mileage and car days equally weighted.

Existing law also requires the board, in making the above assessment, to value the cars by class based on the owners acquisition cost, less depreciation.

This bill would instead require the board, in making the assessment, to value the cars based on the owners acquisition cost, including additions and betterments, less depreciation.

Existing law defines the term class of private railroad cars for purposes of the Private Railroad Car Tax Law.

This bill would delete the definition of the term class of private railroad cars and make various conforming changes.

This bill would take effect immediately as a tax levy.

Existing sales and use tax laws impose taxes on retailers measured by the gross receipts from the sale of tangible personal property sold at retail in this state, or on the storage, use, or other consumption in this state of tangible personal property purchased from a retailer for storage, use, or other consumption in this state, and provides various exemptions from those taxes. Existing law authorizes the State Board of Equalization to file a certificate relating to a persons unpaid sales and use tax, within 10 years after the amount is due, with the office of the Clerk of the Superior Court of Sacramento County or of any county in the state requesting judgment be entered.

This bill would make nonsubstantive changes to these provisions.

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The people of the State of California do enact as follows:SECTION 1.Section 11206 of the Revenue and Taxation Code is repealed.11206.

Class of private railroad cars means the Association of American Railroads, or successor organizations, one letter alpha component of its car type codes as contained in that organizations Exhibit D of the UMLER specification manual or successor exhibit.

SEC. 2.Section 11292 of the Revenue and Taxation Code is amended to read:11292.

In making the assessment, the board shall value the cars by class based on the owners acquisition cost, including additions and betterments, less depreciation. The depreciation shall be computed for these enumerated Association of American Railroads, or successor organizations, car type groups on a straight-line basis with the indicated depreciable life schedules with a maximum of 80 percent depreciation allowed.

(a)Stack cars (alpha S): 22 years minus the age at acquisition.

(b)Lightweight, low profile intermodal cars (alpha Q): 22 years minus the age at acquisition.

(c)Flat cars (alpha F): 22 years minus the age at acquisition.

(d)Conventional intermodal cars (alpha P): 22 years minus the age at acquisition.

(e)Vehicular flat cars (alpha V): 22 years minus the age at acquisition.

(f)All other cars (all other alphas): 25 years minus the age at acquisition.

(g)Betterments: the remaining depreciable life of the car to which the betterment is applied.

Acquisition cost is defined as the expenditures required to be capitalized by generally accepted accounting principles.

SEC. 3.Section 11293 of the Revenue and Taxation Code is amended to read:11293.

In making an assessment, assessment when the tax is imposed on the basis of car days, the board shall determine the average number of each class of private railroad cars physically present in the state in the calendar year immediately preceding the fiscal year in which the tax is imposed upon the basis of car days. The board shall multiply the average number so determined by the average car value of a car of that class as determined under Section 11292 and use the product for the assessment of the cars.

SEC. 4.Section 11293.5 is added to the Revenue and Taxation Code, to read:11293.5.

In making an assessment when the tax is imposed on the basis of mileage, the board shall determine the physical presence of private railroad cars in this state in the calendar year immediately preceding the fiscal year in which the tax is imposed upon the basis of mileage, using the ratio of miles in this state to the total miles. The board shall multiply the ratio so determined by the value as determined under Section 11292 and use the product for the assessment of the cars.

SEC. 5.Section 11294 of the Revenue and Taxation Code is amended to read:11294.

In determining the averages required in Section 11293, the board shall exclude from the California factor car mileage, car days or such other data which occurs while cars are not qualified for revenue service and are in a repair facility in this state requiring and undergoing or awaiting remodeling, overhaul, renovation, conversion or repair which necessitates total labor in excess of 10 man-hours.

Car days excluded pursuant to this section shall not exceed 90 days per car unless the claimant provides substantiation of the necessity for the additional days in such form as prescribed by the board.

SEC. 6.Section 11295 is added to the Revenue and Taxation Code, to read:11295.

(a)For the assessment of tax for the 201718 fiscal year, the board shall determine the physical presence of private railroad cars in this state for the 2016 calendar year upon the basis of both mileage and car days equally weighted.

(b)Commencing with the 201819 fiscal year and for each fiscal year thereafter, the board shall impose the tax on the basis of mileage.

SEC. 7.

This act provides for a tax levy within the meaning of Article IV of the Constitution and shall go into immediate effect.

SECTION 1.Section 6736 of the Revenue and Taxation Code is amended to read:6736.

If any amount required to be paid to the state under this part is not paid when due, the board may, within 10 years after the amount is due, file in the office of the Clerk of the Superior Court of Sacramento County or of any county within the state a certificate specifying the amount required to be paid, interest and penalty due, the name and address as it appears on the records of the board of the person liable, the compliance of the board with this part in relation to the determination of the amount required to be paid, and a request that judgment be entered against the person in the amount required to be paid, together with interest and penalty as set forth in the certificate.

Date	Status
Feb 19, 2016	Introduced. To Com. on RLS. for assignment. To print.
Feb 22, 2016	From printer. May be acted upon on or after March 23.
Feb 22, 2016	Read first time.
Mar 10, 2016	Referred to Com. on RLS.
Mar 28, 2016	From committee with author's amendments. Read second time and amended. Re-referred to Com. on RLS.
Mar 31, 2016	Re-referred to Com. on GOV. & F.
Apr 5, 2016	Set for hearing April 13.
Apr 13, 2016	From committee: Do pass and re-refer to Com. on APPR. (Ayes 6. Noes 0. Page 3518.) (April 13). Re-referred to Com. on APPR.
Apr 13, 2016	From committee: Do pass and re-refer to Com. on APPR. (Ayes 6. Noes 0.) (April 13). Re-referred to Com. on APPR.
Apr 15, 2016	Set for hearing April 25.
Apr 25, 2016	April 25 hearing: Placed on APPR. suspense file.
May 20, 2016	Set for hearing May 27.
May 27, 2016	May 27 hearing: Held in committee and under submission.

Date	Description	Location	Votes
Apr 25, 2016	Placed on suspense file	Senate Standing Committee on Appropriations	7 0 0 Passed
Apr 13, 2016	Do pass, but first be re-referred to the Committee on [Appropriations]	Senate Standing Committee on Governance and Finance	6 0 1 Passed

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SENATE COMMITTEE ON APPROPRIATIONS

Senator Ricardo Lara, Chair

2015 - 2016 Regular Session

SB 1394 (Hall) - Private railroad car tax: valuation


Version: March 28, 2016	Policy Vote: GOV. & F. 6 - 0
Urgency: No	Mandate: No
Hearing Date: April 25, 2016	Consultant: Robert Ingenito

This bill meets the criteria for referral to the Suspense File.

Bill Summary: SB 1394 would modify the apportionment method for the private railroad car tax.

Fiscal Impact:

The Board of Equalization (BOE) indicates that this measure would result in a General Fund revenue loss of $1.5 million in 2017-18, and $2.1 million annually thereafter.
The bill would eliminate BOE’s need to purchase replacement software to maintain the current-law calculation methodology. Thus, the bill would result in an avoidance of a one-time cost of about $500,000. Additionally, the bill would eliminate BOE’s need to continue its current $13,000 annual railroad car registration subscription needed to verify the days that rail cars are present in the State.

Background: Private Rail Cars (PRCs) either transport the owner’s freight, or are leased to shippers. They are more specialized than general freight cars owned by railroads, and include oil tanks and refrigerated cars. Additionally, the PRC industry is fairly concentrated: of 221 private rail car taxpayers, 10 companies control 80 percent of the market, and 20 companies control 90 percent.

The PRC tax program values and assesses railroad cars not owned by railroad companies, but operated on railway lines within California. This is the only property tax administered and collected by the State. Specifically, current law imposes a property tax on PRCs operating on the State’s railroads, and specifies the methodology to value them. BOE determines value based on acquisition cost less depreciation for each railroad car class in the owner’s fleet; current law permits additional deductions in the form of depreciation for cars purchased used and improvements to existing cars. This tax base is subsequently multiplied by the tax rate (the average statewide property tax rate).

Because PRCs are involved in interstate travel, the value calculation must be apportioned among the states. PRCs are taxed on a proportional basis consistent with actual presence in California. Current law requires presence to be measured by the number of “car-days” each car class spent in the State during the preceding calendar year.

Each month, five railroad car companies report border crossing data (movements in and out of California) to BOE, whose software (1) processes this data, and (2) determines the number of days each car was physically present in California during the calendar year immediately preceding each lien date. However, as referenced above, the software that BOE uses to measure “car-days” is nearing the end of its useful life.

Proposed Law: This bill would, among other things, change the method of apportionment from the current system of car days spent in California per year to an equally weighted average of car days and mileage for 2017-18. Thereafter, the bill would set mileage as the exclusive apportionment factor.

Related Legislation:

SB 357 (Hall, 2015) was similar to this bill. Specifically, it also proposed changing to a mileage based system. Additionally, the bill included valuation changes to (1) eliminate additional depreciation given to cars purchased used and (2) eliminate additional depreciation given to new additions and betterments to existing cars. Depreciation would have continued to be calculated for all cars based on a 22- or 25-year life. The bill was held on this Committee’s Suspense File.
AB 2262 (Frazier, 2014) was identical to SB 357; and was also held on this Committee’s Suspense File.

Staff Comments: This bill could result in administrative efficiency gains for both PRC owners and BOE. Utilizing a mileage-based system to calculate the Private Railroad Car Tax would conform to the methodology used by all other states that impose such a tax, making compliance easier for PRC owners. Additionally, BOE notes that a mileage-based system is less complex and costly for it to administer.

The Private Railroad Car Tax is the only property tax that flows to the state’s General Fund, where it generated $9.9 million in 2015, up from $5.9 million in 2009. Annual tax revenues vary, and reflect a variety of factors, including the level of (1) new PRC investment, and (2) the level of California economic activity. Complicating the calculation further is the fact that the revenue estimate depends on two other variables: the aforementioned private rail car tax rate, and an adjustment to comply with the requirements of current federal law (the Railroad Revitalization and Regulatory Reform Act), both of which are developed by BOE’s Research and Statistics Section and approved by the Board Members. Comparing mileage and car-day data for the last several years, BOE concludes that transitioning to a mileage-based system would result in a revenue loss of $1.5 million in 2017-18, and $2.1 million annually thereafter.

The methodological changes proposed by the bill would not impact the assessments of individual companies in a uniform way. Instead, most companies would benefit from the proposed changes, but others could see assessments increase.

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SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Robert M. Hertzberg, Chair

2015 - 2016 Regular

Bill No:	SB 1394	Hearing Date:	4/13/16
Author:	Hall	Tax Levy:	Yes
Version:	3/28/16	Fiscal:	Yes
Consultant:	Grinnell

Private railroad car tax: valuation

Changes the apportionment method for the private railroad car tax.

Background

Section One of Article XIII of the California Constitution provides that all property is taxable unless explicitly exempted by the Constitution or federal law. While locally elected county assessors establish a value for most real and personal property, Section 19 requires the Board of Equalization (BOE) to assess property owned by regulated railroads, except franchises, to the same extent and in the same manner as other property. However, owners of private rail cars that aren’t owned by railroads pay the “Private Railroad Car Tax,” a tax similar to the Vehicle License Fee as both are paid in-lieu of the property tax. The Private Railroad Car Tax is the only property tax that flows to the state’s General Fund, where it generated approximately $9 million in 2015.

Private rail cars either transport its owner’s freight, or are leased to shippers. According to BOE, private rail cars are more specialized than general freight cars owned by railroads, and include oil tanks and refrigerated cars. Additionally, the private rail car industry is fairly concentrated: of 220 private rail car taxpayers, 20 companies control 90% of the market, and 10 companies control 80%.

The tax base is the car’s acquisition cost by class in the owner’s fleet, minus depreciation at a maximum of 80% over 22 years for most cars in specified categories, 25 years for those that don’t fit a specific category. Owners can also depreciate improvements they make to the car, known as “betterments.” Because states are bound by federal law when imposing taxes on interstate commerce, the fleet value must be apportioned based on some measurement of its activities in California compared to its total activity. In this case, state law directs the value of the fleet to be apportioned by multiplying its value by a percentage equal to the average number of days it’s physically present in the state in the last calendar year. The apportioned tax base is then multiplied by the tax rate, equal to the average property tax rate in the state, to calculate tax.

Currently, BOE’s information technology system for calculating the car-day count method for assessing the tax is nearing the end of its useful life. BOE would need to procure new software soon to continue to measure the tax under the current method. Additionally, BOE must pay around $13,000 per year to verify private rail car taxpayers’ accounting of car days. BOE and the private railroad car industry want to change the method for measuring the tax to account for the miles travelled for each car instead of accounting for the average number of days that class of rail cars owned by the taxpayer is in service in California.

Proposed Law

Senate Bill 1394 changes the method of apportionment from the current system of car days spent in California per year, to an equally weighted average of car days and mileage for the 2017-18 fiscal year, and sets mileage as the exclusive apportionment factor for the 2018-19 fiscal year and thereafter.

The measure also deletes references to the class of the car, as railroads do not report mileage by the class of the car. The bill also explicitly adds “additions and betterments” into the value of the car to substitute for the current definition of acquisition cost as “expenditures required to be capitalized by general accounting principles.”

State Revenue Impact

According to BOE, SB 1394 results in revenue losses of $1.5 million in 2016-17, and $2.1 million annually thereafter.

Comments

1. Purpose of the bill. According to the author, “The Ports of Los Angeles and Long Beach are responsible for moving approximately 7 million cargo containers in and out of the United States each year and represent close to 40% of the nation’s imports. Private Railroad Cars (PRC) are the most widely used method to move goods from California’s ports to consumers throughout California, the nation and the world. Current law imposes a property tax on PRCs operating on the state’s railroads based on their time spent in California, not on the distance a PRC travels (as used in other states). The current calculation of PRC property tax relies heavily on an outdated data system and does not accurately reflect standardized modern assessments placed on cargo as it moves throughout the state. This system makes it more difficult to accurately report and collect assessments, increasing oversight costs to the State Board of Equalization (BOE) and PRC owners. SB 1394 modernizes the way the BOE collects assessments on PRCs from the number of days spent in the state to the number of miles traveled within the state. By using a mileage based assessment, BOE administration costs will be reduced and businesses will be able to use a consistent, reliable and standardized method to pay assessments just as they do in other states throughout the country.”

2. Free ride? SB 1394 simplifies the method for assessing the private railroad car tax, as BOE would need only to verify the mileage any car travelled instead of measuring the average days a class of cars spends in service in the state. Additionally, the bill eliminates BOE’s need to replace old information technology, likely creating savings for the state. However, while the administrative cost savings are significant, the bill enacts a large tax cut for the private railcar industry as a whole. Instead, the measure could include an assessment factor or other provision that ensures that the state doesn’t lose any revenue as a result of the method change. The Committee may wish to consider whether the change in the method of assessing the private railroad car tax should result in a net revenue loss, or whether some assessment factor is necessary to ensure revenue neutrality.

3. Not so fast. While antiquated and unique, there are some policy reasons to maintain the current system for apportioning the value of private rail cars for tax purposes. First, the current apportionment methodology accounts for the number of car days in the state, which measures the time a car spends idle, where public safety services are needed to protect it from vandalism. A mileage-based tax does not account for the costs necessary to fund these services. Additionally, the system which SB 1394 would replace allows a terminal state such as California to capture the value of the rail car’s time spent unloading and loading cargo, whereas under a mileage based tax a car’s value is entirely based on its time spent moving cargo.

4. Do it again. SB 1394 is similar to SB 357 (Hall), which the Committee approved unanimously last year, but was subsequently held on the Senate Appropriations Committee suspense file. SB 357 was largely identical to AB 2262 (Frazier, 2014), which the Committee also approved unanimously, but was also held in Senate Appropriations Committee’s suspense file.

Support and Opposition

(4/7/16)

Support: California Railroad Industry, California Taxpayers Association, Railway Supply Institute, TTX Company.

Opposition: Unknown