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Air China Limited v. San Mateo County

May 20, 2009; as modified June 16, 2009

AIR CHINA LIMITED, PLAINTIFF AND APPELLANT,
v.
SAN MATEO COUNTY, DEFENDANT AND RESPONDENT.



(San Mateo County Super. Ct. No. 460878) Trial Judge: Honorable Marie S. Weiner.

The opinion of the court was delivered by: Rivera, J.

CERTIFIED FOR PUBLICATION

Air China Limited appeals from a summary judgment entered in favor of San Mateo County finding that the County's assessment and collection of taxes on Air China's leasehold possessory interests and landing rights at the San Francisco International Airport (Airport) pursuant to California Revenue and Taxation Code*fn1 sections 107 and 107.9 was proper. Air China contends that a tax treaty between the United States and the People's Republic of China (PRC) prohibits the County from imposing taxes on its operations at the Airport, and that the taxes are contrary to the United States Internal Revenue Code and to the Chicago Convention on International Civil Aviation, December 7, 1944, 61 Stat. 1180, 1189 (the Chicago Convention). We affirm.

I. FACTUAL BACKGROUND

The parties stipulated to the following facts: Air China is a corporation organized and existing under the laws of the PRC and is engaged exclusively in international air transportation serving various cities throughout the world including San Francisco. Air China operates aircraft out of the Airport and leases space there that it uses exclusively for its air transportation operations.

The United States and the PRC are parties to a tax treaty-"Agreement between the Government of the United States of America and the People's Republic of China with Respect to Mutual Exemptions from Taxation of Transportation Income of Shipping and Air Transport Enterprises" (Tax Treaty). The Tax Treaty exempts both the United States and the PRC from taxation by the other party for income and profits generated from the operation of aircraft in international air transportation.

Air China leases space from the Airport and makes payments for the use of the premises. Air China also pays landing fees for the right to land at the Airport. Since 2000, the County has imposed property taxes including possessory interest taxes on Air China's leasehold improvements, and landing rights at the Airport. Air China has paid these taxes under protest.

On October 21, 2002, the California State Board of Equalization (Board) issued a letter opinion in response to an inquiry by Air China concerning the Tax Treaty's tax exemption. The Board concluded that the County's imposition of any property tax on Air China's aircraft or other property including possessory interests was prohibited by the Tax Treaty.

In May 2006, Air China requested a refund of taxes under section 5096. The County did not issue a formal response to the request. In February 2007, Air China commenced this action seeking a refund and a declaration that the possessory interest taxes imposed are prohibited by the Tax Treaty. The parties subsequently filed motions for summary judgment based on the above stipulated facts. The court granted the County's motion, finding that the Tax Treaty did not prohibit imposition of taxes on Air China's possessory and leasehold interests and denied Air China's motion. This appeal followed.

II. DISCUSSION

A. Standard of Review

This appeal presents a question of law on stipulated facts. We therefore review the trial court's judgment de novo. (MacIsaac v. Waste Management Collection & Recycling, Inc. (2005) 134 Cal.App.4th 1076, 1081-1082.)

B. The County Has the Right to Tax Air China's Possessory Interests

The County has the right to assess taxes on property within its jurisdiction. (Cal. Const., Art. XIII, § 1; see also § 201 [all property within the State is subject to taxation if not exempt under federal law or other state law].) Pursuant to section 107, the County may tax possessory interests in land or improvements if certain conditions are met. A possessory interest is a "[p]ossession of, claim to, or right to the possession of land or improvements . . ., except when coupled with ownership of the land or improvements in the same person." (§ 107, subd. (a).) In order for a possessory tax to be valid, the right of possession in the property must be independent, durable, and exclusive of rights held by others in the property. (United Air Lines, Inc. v. County of San Diego (1991) 1 Cal.App.4th 418, 427, fn. 5; Freeman v. County of Fresno (1981) 126 Cal.App.3d 459, 463.) " `[T]axation of possessory interests is rooted in the belief that "the holder of a valuable use of public property that is tax exempt should contribute taxes to the public entity which ...


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