Appeals from judgments of the Superior Court of Orange County, William M. Monroe, Judge. (Super. Ct. No. 30-2008-00107805) (Super. Ct. No. 30-2008-00110932) (Super. Ct. No. 30-2009-00288116) (Super. Ct. No. 30-2009-00303518)
The opinion of the court was delivered by: Fybel, J.
CERTIFIED FOR PUBLICATION
Respondents sell fractional interests in private jets, and manage those jets for the fractional owners. In 2007, the California Legislature enacted new legislation to assess a personal property tax against the managers of fractionally owned aircraft. The legislation added sections 1160, 1161, 1162, and 5368 to the Revenue and Taxation Code, and amended Revenue and Taxation Code sections 441 and 452 (the Legislation). (All further statutory references are to the Revenue and Taxation Code, unless otherwise specified.) Respondents challenged the Legislation, and the trial court concluded it was unconstitutional or otherwise unlawful.
We hold the tax on the fractionally owned aircraft assessed by the Legislation is constitutional and lawful, as against the substantive challenges raised by respondents. We agree with the trial court's ruling, however, that the new assessment cannot be applied retroactively. Accordingly, we hold retroactive application of the new tax assessment is unconstitutional.
We reverse and direct the trial court to enter judgments providing that the retroactivity provisions of the Legislation are unconstitutional, but that the Legislation is lawful and constitutional in all other respects challenged by respondents.
NetJets Aviation, Inc., NetJets International, Inc., and NetJets Large Aircraft, Inc. (collectively, NetJets), are Delaware corporations, with their principal places of business in Ohio, South Carolina, and Connecticut, respectively. Flight Options, LLC (Flights Options), is a Delaware limited liability company, with its principal place of business in Ohio. CitationShares Management, LLC (CitationShares), is a limited liability company organized under the laws of Delaware, with its principal place of business in Connecticut. Bombardier Aerospace Corporation (Bombardier) is a Texas corporation, with its principal place of business in Texas.*fn1
In November 2003, the Federal Aviation Administration (FAA) enacted regulations pertaining to fractional ownership of aircraft and program management services for such fractionally owned aircraft. (14 C.F.R. § 91.1001 et seq. (2012).) Fractional owners purchase fractional interests in a specific aircraft, and are allotted a specified number of hours of access to the aircraft, depending on the size of their ownership interests.
A fractional owner enters into a number of operating agreements regarding the ownership interest: (1) a purchase agreement, by which the owner acquires an undivided share in one aircraft, agrees not to transfer its interest without the respective Respondent's consent, agrees to use the aircraft exclusively in the fractional ownership program, transfers possession of the aircraft back to Respondent, and grants Respondent the right to sell additional fractional interests in the aircraft and the right to repurchase the fractional interests under specific conditions; (2) a management agreement, by which the fractional owner gives Respondent the exclusive right to manage the aircraft, and agrees to pay a monthly management fee and an hourly fee for the time the aircraft is used, and by which Respondent agrees to staff, provide pilots for, and maintain the aircraft, and retains the right to use the aircraft when not being used by a fractional owner; (3) an owner's agreement, by which each fractional owner agrees that the aircraft will be used exclusively in the fractional ownership program; and (4) a master interchange agreement or dry lease exchange agreement,*fn2 by which all fractional owners agree that they will participate in the fractional ownership program under the relevant operating agreements, and that the aircraft for which the owner is on title will be used in the program.
Respondents are managers for fractionally owned aircraft in their respective fleets. Respondents make fractional shares of aircraft available for purchase. They also provide central management of the aircraft including furnishing pilots, obtaining insurance, maintaining the aircraft, and administering a reciprocal leasing arrangement by which fractional owners may use another aircraft if the aircraft in which they own a fractional share is unavailable.
Each of the Respondents also offers access to the aircraft to nonfractional owners. (Bombardier does not operate its own program, but leases unused fractional shares to an independent charter air carrier.) The same aircraft that make up the fractional ownership program are used for these programs.
In California, general aviation aircraft are taxed as personal property in the county in which they are hangared. (Cal. Code Regs., tit. 18, § 204; 1 Ehrman & Flavin, Taxing Cal. Property (4th ed. 2011) § 7.6; Bd. of Equalization, Assessors' Handbook (Oct. 2002) § 504, Assessment of Personal Property and Fixtures, p. 36 [as of June 21, 2012].) Commercial aircraft are taxed based on an allocation formula that considers the time the aircraft spends in California (whether on the ground or in flight) and the number of arrivals and departures the aircraft makes within California. Both of those factors are then compared proportionally to the overall time and the overall number of arrivals and departures during the time period. (§ 1150 et seq.; Cal. Code Regs., tit. 18, § 202; 1 Ehrman & Flavin, Taxing Cal. Property, supra, § 7.7; Bd. of Equalization, Assessors' Handbook, supra, § 504, pp. 40-41.) Because of the hybrid nature of fractionally owned aircraft, before 2007 they had not been taxed by any taxing authority in California, despite the constitutional and statutory requirement that all nonexempt property be taxed. (Cal. Const., art. XIII, § 1; § 405, subd. (a).)
In April 2006, the Los Angeles County Assessor inquired of the State Board of Equalization (the Board) whether fractionally owned aircraft were subject to property taxation in California. The Board responded the aircraft could be taxable in California, but did not determine whether any individual aircraft had acquired a taxable situs in California. The Board also determined that Respondents could be taxed directly if they maintained possession and control over the aircraft.
In 2007, the California Legislature proposed Senate Bill No. 87 to capture tax revenue on fractionally owned aircraft. "The Legislature finds and declares the following: [¶] (a) A substantial portion of business aviation aircraft is now owned and operated under fractional ownership programs. [¶] (b) Aircraft in fractional ownership programs have a significant presence in California. [¶] (c) The size of some fractional ownership program fleets is quite large and the mix of ownership interests and unscheduled usage imposes a significant burden on both taxpayers and county assessors to assess and tax these fleets on an aircraft-by-aircraft basis; in order to reduce this burden, a simplified assessment approach is warranted. [¶] (d) Section 1 of Article XIII of the California Constitution specifies that all nonexempt property is taxable. Therefore, fractionally owned aircraft are constitutionally required to be assessed. [¶] (e) The purpose of Sections 2 and 4 of this act is to establish a simplified procedure for assessing fractionally owned aircraft that is appropriate and fair, that allocates assessed value among counties in a reasonable manner, and that reduces the administrative burden on taxpayers and county assessors." (Stats. 2007, ch. 180, § 1.)
Senate Bill No. 87, which was enacted as the Legislation, amended and added certain sections of the Revenue and Taxation Code. Of particular importance is the addition of sections 1160 and 1161, which creates a means for calculating the tax due on fractionally owned aircraft, using an allocation system. Section 1160 sets out the definitions applicable to the Legislation: "For purposes of this article, all of the following apply: [¶] (a) The following terms have the following meanings: [¶] (1) 'Aircraft' has the same meaning as specified in Section 5303. [¶] (2) 'Fleet' means all aircraft operated by a manager of a fractional ownership program. [¶] (3) 'Fleet type' means aircraft classified by make, model, and series operated by a manager of a fractional ownership program. [¶] (4) 'Fractionally owned aircraft' or 'aircraft operated in fractional ownership programs' means those aircraft registered with the Federal Aviation Administration as fractionally owned aircraft. [¶] (5) 'Landing' means physical contact involving the embarking or disembarking of crew, passengers, or freight, and that physical contact did not arise unintentionally as the result of an emergency. [¶] (b) Revenues derived from the taxation of fractionally owned aircraft under this article shall be distributed in accordance with Chapter 6 (commencing with Section 5451) of Part 10 of this division. [¶] (c) Fractionally owned aircraft shall be assessed under this article only if a lead county assessor accepts a designation as lead county assessor under Section 1162."
Section 1161 specifies the entities that may be assessed the tax on fractionally owned aircraft, and the assessment period: "(a) Notwithstanding any other law, fractionally owned aircraft that has situs in this state shall be assessed on a fleetwide basis to the manager in control of the fleet and a notice of that assessment shall be issued to that manager. [¶] (1) Any fractionally owned aircraft that has been annually assessed for the fiscal years preceding the 2007-08 fiscal year shall be assessed under this article commencing with the 2007-08 fiscal year. [¶] (2) For fractionally owned aircraft that have not been annually assessed for the fiscal years preceding the 2007-08 fiscal year, assessment under this article applies for the 2007-08 fiscal year and for each fiscal year thereafter, and for preceding fiscal years for which an assessment was not made, and for which a statute of limitations either does not apply or has been waived. [¶] (b) A fleet of fractionally owned aircraft establishes situs in this state if an aircraft within the fleet makes a landing in the state. [¶] (c) A fleet of fractionally owned aircraft shall be assessed on an allocated basis. An allocation factor shall be established in each county for each fleet type of fractionally owned aircraft for which situs in this state has been established as described in subdivision (b). This allocation factor is a fraction, the numerator of which is the total number of landings and departures made by the fleet type in the county during the previous calendar year and the denominator of which is the total number of landings and departures made by the fleet type worldwide during the previous calendar year." (Italics added.)
The Legislative Counsel's Digest of Senate Bill No. 87 describes the purpose of the Legislation as follows: "Existing property tax law requires that aircraft, other than certificated aircraft, be valued and assessed only in the county in which it is habitually situated. Existing property tax law requires owners, as well as operators, of private and public airports, to provide the assessor of the county in which the airport is situated, with specified information regarding aircraft using the airport as a base, to be used by the assessor in the assessment of aircraft at market value. [¶] This bill would instead provide a formula, based upon the number of landings in and departures from a county in proportion to landings and departures worldwide, to assess a fleet of fractionally owned aircraft, as defined, that would be taxed by the counties where the fleet lands. This bill would require that the fleet be assessed to the manager in control of the fleet, as specified. This bill would specify that this fleetwide assessment applies for the 2007-08 fiscal year and each fiscal year thereafter, and also to specified prior fiscal years. . . . [¶] . . . [¶] This bill would declare that it is to take effect immediately as an urgency statute."
After the enactment of the Legislation, local tax assessors began assessing Respondents as managers "in control of the fleet[s]" (§ 1161, subd. (a)), not as representatives of the fractional owners. The assessments extended back to January 1, 2002.
NetJets and Flight Options filed separate lawsuits in Orange County Superior Court, against Webster J. Guillory, in his capacity as the Orange County Tax Assessor, challenging the legality and constitutionality of the Legislation and the assessments made thereunder. Bombardier and CitationShares filed similar lawsuits in Santa Barbara County Superior Court, against Joseph E. Holland, in his capacity as the Santa Barbara County Tax Assessor. The Santa Barbara cases were transferred to Orange County Superior Court, and the four cases were consolidated for purposes of trial. Guillory and Holland will be referred to in this opinion as the Assessors.
Each of the Respondents filed a dispositive motion for declaratory relief. The parties presented their cases by means of written briefs and declarations; no live witness testimony was offered. Following oral argument, the trial court issued a minute order reading, in relevant part, as follows:
"First, [Respondents] argue that assessments and collections for the [period] before 1/1/07 are unconstitutionally retroactive.
"The U.S. Supreme Court has explained that a 'wholly new' tax may not be imposed retroactively. [Citations.] For purposes of substantive Due Process, the court must ask whether such taxes are 'harsh and oppressive' [citation]. Both Federal and California courts seem to agree, however, that taxes may be imposed retroactively during the preceding year (i.e., the year of the legislative session in which it was enacted, or the current tax year). [Citations.] Longer periods of retroactivity are regarded with suspicion. [Citation.]
"It seems undisputed that [Respondents] have been assessed for taxes, supposedly owed under SB 87, going all the way back to 1/1/02. . . .
"SB 87 appears to be a 'wholly new' tax, rather than a mere clarification of existing tax law.
"[The Assessors] argue that SB 87 did not impose a 'wholly new' tax, but merely 'clarified' existing law regarding aircraft taxation.
"The legislative history of SB 87 suggests that it is far more than a mere clarification of existing tax law. [Citation.] The State Board of Equalization, in their internal correspondence, likewise seems to have regarded SB 87 as entirely new law . . . .
"SB 87 imposes a 'harsh' and 'oppressive' burden on [Respondents] in violation of Due Process.
"[The Assessors] argue that even if SB 87 is a retroactive tax, it is still not 'harsh' or 'oppressive' enough to violate Due Process. [Citation.] The Supreme Court, they note, has upheld retroactive taxation where (1) the legislative purpose is neither illegitimate nor arbitrary; and (2) the legislative body acts promptly and establishes only a modest period of retroactivity. [Citation.]
"[Respondents] argue that SB 87's five-year retroactivity period is not modest, in that it would force aircraft managers to spend a great deal of time and effort hunting for documentation relating to fractionally-owned aircraft going all the way back to 2002; and that their contractual arrangements with their former customers may prevent them from collecting the retroactive tax from such customers. . . . A burden of this kind indicates that the period of retroactivity is not 'modest.' [Citation.]
"Second, [Respondents] argue that SB 87 unlawfully assesses the tax against the aircraft managers, who have neither ownership nor control nor possession of the fractionally-owned aircraft. . . .
"California Revenue & Taxation Code Section 405(a) mandates that tax assessors '. . . assess all the taxable property in his county, except state-assessed property, to the persons owning, claiming, possessing, or controlling it on the [tax] lien date'. Revenue & Taxation Code Section 611 similarly provides that '[i]f the name of an absent ...