September 26, 2019
Intangible assets have a tax-exempt status when it comes to property tax, and assessors must take that into account when they value properties. This sets precedent for the State of California in addressing how property tax is handled and had to be determined by an Appeals Court in that state. The decision stemmed from a case where a company that offered duty-free sales at airports believed it was being treated unfairly where property tax was concerned. The assessor in San Mateo County chose to use the income method for property tax assessment, which was based on the fee that was paid to the airport by the company.
Treating that fee as economic rent was deemed to be incorrect, because of the ruling on intangible assets. In effect, the market value of a property that produced income was looked at in the sense of its expected stream of future income. That expected income isn’t guaranteed and isn’t a tangible asset for property tax purposes. The case went all the way to court, where it was upheld. Then it went to a California Appeals Court, where it was overturned. That was a victory for owners of commercial property in the state, but it was hard-fought and could still be challenged in the future. This ruling also comes in the midst of an ever-changing property tax environment, with the state of California currently hosting 4 “property tax modernization forums” to look at many things including the split roll and Prop 13 changes.
The overall ruling detailed that part of the exemption was focused on exclusive operating rights, which the company had as part of their agreement with the San Francisco Airport. The company’s argument against the taxation was that, by taxing the entire annual payment, they were being taxed on the concession rights as well as the use and occupancy. Those concession rights are intangible assets, and should not be taxable. Deducting those concession rights would have made the tax fairer.
The Appeals Court determined that the exclusive rights the company held were intangible assets, and not available for taxation. That meant the method the assessor used was unlawful, and the company should not have to pay that level of tax. By showing that the intangibles in valuation were included, the company shifted the burden to the assessor to show that value had been removed. Unable to do that, the assessor lost the case. This is one of many changes happening in regards to California property tax and we will continue to bring you the latest.