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Western States Petroleum v. Board of Equalization

Supreme Court of California

August 5, 2013

WESTERN STATES PETROLEUM, Plaintiff and Respondent,
BOARD OF EQUALIZATION, Defendant and Appellant.

Los Angeles County Super. Ct. No. BC403167, Ct.App. 2/8 B225932, Robert L. Hess Judge.

Kamala D. Harris, Attorney General, David S. Chaney, Chief Assistant Attorney General, Alicia Fowler, Acting Chief Assistant Attorney General, Paul D. Gifford, Assistant Attorney General, Felix E. Leatherwood, W. Dean Freeman and Brian D. Wesley, Deputy Attorneys General, for Defendant and Appellant.

Letwak & Bennett and Stephen H. Bennett as Amici Curiae on behalf of Defendant and Appellant.

John F. Krattli, County Counsel (Los Angeles) and Albert Ramseyer, Principal Deputy County Counsel, for Los Angeles County Office of the Assessor as Amicus Curiae on behalf of Defendant and Appellant.

Sharon L. Anderson, County Counsel (Contra Costa), Rebecca Hooley, Deputy County Counsel; Greenan, Peffer, Sallander & Lally, Kevin D. Lally, John P. Makin and Robin L. Thornton for Contra Costa County as Amicus Curiae on behalf of Defendant and Appellant.

Cahill Davis & O’Neall, C. Stephen Davis, Cris K. O’Neall and Andrew W. Bodeau for Plaintiff and Respondent.


This case presents the issue of how petroleum refinery property should be valued for purposes of taxation. In 1979, in response to the passage of Proposition 13 and related constitutional and statutory enactments, the state Board of Equalization (Board) enacted a rule for assessing the value of most industrial property. (See Cal. Code Regs., tit. 18, § 461.) Under that rule, the value of fixtures, including machinery and equipment, was assessed separately from the value of land and improvements. Petroleum refinery property was assessed in this manner. The separate valuation of fixtures was advantageous to industrial property owners because it allowed them to maximize the tax savings attributable to the depreciation of fixtures.

In 2007, the Board enacted rule 474 (Cal. Code Regs., tit. 18, § 474; hereafter Rule 474) in light of evidence that petroleum refinery property — land, improvements, and fixtures — was generally sold as a unit. Rule 474 provides that the value of such property, unlike most industrial property, must be assessed as a unit. The Western States Petroleum Association (WSPA) sued to invalidate the regulation. WSPA contends that Rule 474 is inconsistent with Proposition 13 and related statutory enactments, and is therefore an unlawful exercise of the Board’s rulemaking authority. WSPA also contends that the rule is procedurally invalid because the Board failed to assess the economic impact of the regulation as required by the Administrative Procedures Act (APA) (Gov. Code, § 11346 et seq.).

The trial court and the Court of Appeal held Rule 474 invalid on both grounds. We conclude that the Court of Appeal erred in finding Rule 474 to be substantively invalid. As explained below, Rule 474 is consistent with applicable constitutional and statutory provisions, and it is also consistent with the long-standing valuation principle that the proper appraisal unit is the collection of assets that persons in the marketplace normally buy and sell as a single unit. Thus, the adoption of Rule 474 did not exceed the Board’s rulemaking authority. At the same time, however, we hold that the Board failed to provide an adequate assessment of the rule’s economic impact as required by the APA. Under the APA, the Board was required to make a reasoned estimate of all cost impacts of the rule on affected parties. This the Board did not do. Accordingly, we affirm the judgment of the Court of Appeal on the ground that Rule 474 is procedurally deficient under the APA.

We note that “[o]rdinarily, when an appellate court concludes that affirmance of the judgment is proper on certain grounds it will rest its decision on those grounds and not consider alternative grounds which may be available. [Citations.] [ ] However, appellate courts depart from this general rule in cases where the determination is of great importance to the parties and may serve to avoid future litigation [citations], or where the issue presented is of continuing public interest and is likely to recur. [Citation.])” (Filipino Accountants’ Assn. v. State Bd. of Accountancy (1984) 155 Cal.App.3d 1023, 1029–1030; see also County of Marin v. Superior Court (1960) 53 Cal.2d 633, 640; 9 Witkin Cal. Procedure (5th ed. 2008) Appeal, § 344, pp. 394–395.) Here, although the rule’s procedural deficiency is a sufficient basis for affirming the Court of Appeal’s judgment, our consideration of the substantive ground for invalidating the rule is warranted. The issue presents a question of law, it has been thoroughly briefed, and it is a matter of considerable importance to the parties and to the public.


Article XIII, section 1 of the California Constitution declares that “[a]ll property is taxable and shall be assessed at the same percentage of fair market value.” (Cal. Const., art. XIII, § 1, subd. (a).) Proposition 13, an initiative measure enacted in June 1978, added article XIII A to the California Constitution and changed the taxation of real property by replacing “the fair market valuation standard with that of acquisition value.” (Roy E. Hanson, Jr. Mfg. v. County of Los Angeles (1980) 27 Cal.3d 870, 873.) Article XIII A, section 2 provides that all real property, except for property acquired prior to 1975, shall be assessed and taxed at its value on the date of acquisition, subject to a 2 percent maximum annual inflationary increase. (Amador Valley Joint Union High Sch. Dist. (1978) 22 Cal.3d 208, 235.) This is sometimes referred to as the indexed or adjusted base year value. (See Bd. of Equalization, Assessors’ Handbook Section 501, Basic Appraisal (2002 rev.) appen. A, Assessment Pre- and Post-Proposition 13, p. 137.)

Proposition 13 did not address how real property should be assessed and taxed when its market value declines instead of appreciates. To address this issue, California voters passed Proposition 8 in November 1978. Proposition 8 amended article XIII A so that it now reads: “The full cash value base may reflect from year to year the inflationary rate not to exceed 2 percent for any given year or reduction as shown in the consumer price index or comparable data for the area under taxing jurisdiction, or may be reduced to reflect substantial damage, destruction, or other factors causing a decline in value.” (Cal. Const., art. XIII A, § 2, subd. (b).) In other words, when the value of real property declines to a level below its adjusted base year value under Proposition 13, the value of the property is determined according to its actual fair market value.

The Legislature formed a task force to study the implementation of the new real property tax system mandated by Proposition 13 and Proposition 8. In January 1979, the task force submitted a report and recommendations to the Assembly Committee on Revenue and Taxation, officially titled Report of the Task Force on Property Tax Administration (hereafter Task Force Report). (See Pacific Southwest Realty Co. v. County of Los Angeles (1991) 1 Cal.4th 155, 161.) The Task Force Report has been recognized as a statement of legislative intent for purposes of interpreting the statutes enacted to implement Proposition 13 and Proposition 8. (See, e.g., Auerbach v. Assessment Appeals Bd. No. 1 (2006) 39 Cal.4th 153, 161.)

The report recommended that “the assessed value of real property be the lesser of the Prop. 13 base value compounded annually by 2% or full cash value. These changes will be measured by that appraisal unit which is commonly bought and sold in the market, or which is normally valued separately.” (Task Force Rep., supra, at p. 29.) Revenue and Taxation Code section 51 was subsequently amended to incorporate the task force recommendations. (All further statutory references are to the Revenue and Taxation Code unless otherwise specified.) Section 51, subdivision (a) (hereafter section 51(a)) provides that “the taxable value of real property shall . . . be the lesser of: [ ] (1) Its base year value, compounded since the base year by an inflation factor” not to exceed 2 percent per year, or “(2) Its full cash value, as defined in Section 110, as of the lien date, taking into account reductions in value due to damage, destruction, depreciation, obsolescence, removal of property, or other factors causing a decline in value.” Section 110, subdivision (a) defines the term “full cash value, ” synonymously with the term “fair market value, ” as “the amount of cash or its equivalent that property would bring if exposed for sale in the open market under conditions in which neither buyer nor seller could take advantage of the exigencies of the other, and both the buyer and the seller have knowledge of all of the uses and purposes to which the property is adapted and for which it is capable of being used, and of the enforceable restrictions upon those uses and purposes.”

Most significantly for this case, the term “real property” under section 51, subdivision (d) (hereafter section 51(d)) is defined as “that appraisal unit that persons in the marketplace commonly buy and sell as a unit, or that is normally valued separately.” This definition echoes almost verbatim the definition recommended by the Task Force Report. The statute does not further define “appraisal unit, ” but the term is defined by regulation as “a collection of assets that functions together, and that persons in the marketplace commonly buy and sell as a single unit or that is normally valued in the marketplace separately from other property . . . .” (Cal. Code Regs., tit. 18, § 324.)

In the wake of Proposition 13 and Proposition 8, and shortly before the enactment of section 51, the Board promulgated and then amended rule 461, a regulation applicable to most real property used for manufacturing. (Cal. Code Regs., tit. 18, § 461 (Rule 461).) Rule 461, subdivision (e) (hereafter Rule 461(e)) provides: “Declines in value will be determined by comparing the current lien date full value of the appraisal unit to the indexed base year full value of the same unit for the current lien date. Land and improvements constitute an appraisal unit except when measuring declines in value caused by disaster, in which case land shall constitute a separate unit. For purposes of this subdivision, fixtures and other machinery and equipment classified as improvements constitute a separate appraisal unit.”

At the same time that it adopted Rule 461(e)’s classification of fixtures as “a separate appraisal unit, ” the Board adopted two exceptions to this rule for certain types of industrial property where land and fixtures were valued as a single unit in the marketplace: Rule 468, which applies to oil and gas properties, and Rule 469, which applies to mining properties. (See Cal. Code Regs., tit. 18, §§ 468, subd. (c)(6) (Rule 468), 469, subd. (e)(2)(C) (Rule 469).) Rule 473, adopted in 1995, similarly treats land and fixtures on geothermal properties as a single appraisal unit. (Cal. Code Regs., tit. 18, §473(e)(4)(C) (Rule 473).) Petroleum refinery property was covered by Rule 461(e) until the Board’s adoption of Rule 474.

In September 2006, the Board voted three to two to adopt Rule 474 to address “the valuation of the real property, personal property, and fixtures used for the refining of petroleum.” (Rule 474, subd. (a).) Subdivision (b)(1) of Rule 474 states that “[t]he unique nature of property used for the refining of petroleum requires the application of specialized appraisal techniques designed to satisfy the requirements of article XIII, section 1, and article XIII A, section 2, of the California Constitution. To this end, petroleum refineries and other real and personal property associated therewith shall be valued pursuant to the principles and procedures set forth in this section.” Rule 474, subdivision (c)(2) states that “ ‘[a]ppraisal unit’ consists of the real and personal property that persons in the marketplace commonly buy and sell as a unit.” Most pertinent here, subdivision (d) states that “[f]or the purposes of this section: [ ] (1) Declines in value of petroleum refining properties will be determined by comparing the current lien date full value of the appraisal unit [i.e., its value in an open market transaction] to the indexed base year full value of the same unit [i.e., its Proposition 13 value]. [ ] (2) The land, improvements, and fixtures and other machinery and equipment classified as improvements for a petroleum refining property are rebuttably presumed to constitute a single appraisal unit . . . . [ ] (3) In rebutting this presumption, the assessor may consider evidence that: [ ] (A) The land and improvements including fixtures and other machinery and equipment classified as improvements are not under common ownership or control and do not typically transfer in the marketplace as one economic unit; or, [ ] (B) When the fixtures and other machinery and equipment classified as improvements are not functionally and physically integrated with the realty and do not operate together as one economic unit.” (Italics added.)

The difference between treating fixtures as a separate appraisal unit (Rule 461(e)) and treating fixtures and land together as a single appraisal unit (Rule 474) may be illustrated by a hypothetical drawn from a Board staff report. (For brevity, we will use the term “land” to refer to land and “non-fixture” improvements considered together unless otherwise indicated.) Suppose that following the purchase of a petroleum refinery property, the assessed value in “Year 1” of the land is $2 million and the assessed value of the fixtures is $1 million. Now suppose the land appreciates at $100, 000 per year while the fixtures, when appraised separately, depreciate at $100, 000 per year. Under Rule 461(e), the treatment of fixtures as a separate appraisal unit means that the assessed value of the fixtures will decline by $100, 000 each year, while the land, though appreciating at $100, 000 per year, will yield an assessed value that increases by only 2 percent each year, the maximum increase allowed by Proposition 13. The results are shown in the following table:

Assessed value






$2, 000, 000

$1, 000, 000

$3, 000, 000


$2, 040, 000

$900, 000

$2, 940, 000


$2, 080, 800

$800, 000

$2, 880, 800


$2, 122, 416

$700, 000

$2, 822, 416


$2, 164, 864

$600, 000

$2, 764, 864


$2, 208, 162

$500, 000

$2, 708, 162

By contrast, if land and fixtures were treated as a single appraisal unit under Rule 474, the total assessed value of petroleum refinery property beyond Year 1 would be greater than the values shown above. When such property is treated as a single unit, fixture depreciation ($100, 000 per year) may be offset by the full amount of land appreciation ($100, 000 per year), resulting in a total assessed value of $3 million each year. The total assessed value may be even greater than $3 million beyond Year 1 (though no greater than a 2 percent annual increase) to the extent that fixture values decline by less than $100, 000 per year when petroleum refinery fixtures are bought and sold in the open market as a single unit with the underlying land. Thus, owners of petroleum refinery property pay higher property taxes under Rule 474 than under Rule 461(e).

Before adopting Rule 474, the Board held a hearing at which several public officials testified in favor of the rule. Typical was the testimony of Rick Auerbach, the Los Angeles County Assessor, who stated that in his experience “refineries in California... are bought and sold as a unit.... I am not aware of one that has not been sold as a unit. If we have a case where there is the potential for a refinery to be dismantled and sold — where the fixtures are sold separately, the proposed rule is a rebuttable presumption and we would take that into account. And we would value the fixtures separately.”

The Board concluded in its final statement of reasons before adopting the rule that “sufficient evidence in the rulemaking record exists to determine that proposed Rule 474 is necessary to obtain assessments more accurately reflecting how petroleum refinery properties would actually trade in the marketplace.... At the June 27, 2006 Property Tax Committee meeting, Thomas Parker, Deputy County Counsel, Sacramento County; Rick Auerbach, Los Angeles County Assessor and President of the California Assessor’s Association; Lance Howser, Chief Assessor, Solano County; and Robert Quon, Director of Major Appraisals for the Los Angeles County Assessor’s office, all testified that refineries are in fact bought, sold, and valued as a single unit. In the same meeting, Mr. Auerbach testified that refineries are different from other heavily-fixtured manufacturing industries such as breweries, canneries, and amusement parks and toy manufacturing. Refineries are unique in that up to 80 percent of their values are contained in the fixtures and because the land and fixtures are so integrated, it is difficult to physically separate the fixtures from the land. Further, the land and fixtures are also so economically integrated that a buyer normally would not, in a fair market transaction, purchase the land separately from the fixtures or the fixtures separately from the land. [¶] Since petroleum refineries are bought and sold as a unit consisting of land and fixtures, to value the fixtures separate and apart from the land may result in assessed values either below or above fair market value in violation of Propositions 8 and 13.”

Petroleum industry counsel submitted evidence to the Board, mostly in the form of for-sale advertisements and newspaper articles, showing that refinery fixtures are sometimes dismantled and sold separately.

In November 2007, the Office of Administrative Law approved the regulation, and it became effective in December 2007. In December 2008, WSPA filed a complaint challenging Rule 474’s validity, alleging four causes of action and seeking a declaration that (1) the Board violated the APA because Rule 474 is inconsistent with California Constitution article XIII A and section 51(d), and not necessary to implement such law; (2) Rule 474 violates article XIII A’s cap on year-to-year increases in assessed value of real property; (3) Rule 474 violates article XIII A’s requirement of a two-thirds vote of the Legislature for raising real property taxes; and (4) Rule 474 violates petroleum refiners’ constitutional right to equal protection and uniformity of laws.

In October 2009, the Board and WSPA filed cross-motions for summary judgment. WSPA argued that Rule 474 violates section 51(d) and California Constitution article XIII A, and that the Board failed to provide an adequate statement of economic impact as required by the APA. The trial court granted WSPA’s summary judgment motion on both grounds, and the Court of Appeal affirmed on both grounds. We granted review.


We first address the standard of review. Government Code section 15606, subdivision (c) authorizes the Board to “[p]rescribe rules and regulations to govern local boards of equalization when equalizing, and assessors when assessing....” Further, the Board is empowered to “[p]repare and issue instructions to assessors designed to promote uniformity throughout the state and its local taxing jurisdictions in the assessment of property for the purposes of taxation.” (Id., subd. (e).) Such rules “shall include, but are not limited to, rules, regulations, instructions, and forms relating to classifications of kinds of property and evaluation procedures.” (Id., subd. (f).) As these provisions indicate, the orderly functioning of our property tax system depends on administrative regulations to implement general statutory directives. The precise content of such regulations is neither mandated nor prohibited by statute and may depend on the application of statutory principles to particular factual situations. Rule 474 is one such regulation arising from the Board’s exercise of its quasi-legislative power to issue generally applicable and legally enforceable regulations pursuant to statutory authorization. (See American Coatings Assn. v. South Coast Air Quality Management Dist. (2012) 54 Cal.4th 446, 460 (American Coatings).)

As discussed below, the Board in promulgating Rule 474 was required not only to interpret the relevant statute but also to evaluate whether the evidence presented to it was sufficient to warrant a special rule governing petroleum refinery property. The latter task involves the exercise of the Board’s discretion. Justice Kennard contends that Rule 474 was an interpretive and not a quasi-legislative regulation, citing Carmona v. Division of Industrial Safety (1975) 13 Cal.3d 303, 309–310 (Carmona). (See conc. and dis. opn. by Kennard, J, post, at pp. 8–9.) But Carmona is distinguishable because the agency there “viewed the question before it as a matter involving the interpretation and application of an existing regulation” and therefore was not making “a quasi-legislative judgment declining to promulgate a new regulation.” (Carmona, at p. 310.) In issuing Rule 474, the Board has clearly promulgated a new regulation applying to a specific class of property and, in so doing, has made a quasi-legislative judgment based on its evaluation of the evidence as well as its understanding of the statute.

As our precedent has stated, “quasi-legislative rules... represent[] an authentic form of substantive lawmaking: Within its jurisdiction, the agency has been delegated the Legislature’s lawmaking power. [Citations.] Because agencies granted such substantive rulemaking power are truly ‘making law, ’ their quasi-legislative rules have the dignity of statutes. When a court assesses the validity of such rules, the scope of its review is narrow. If satisfied that the rule in question lay within the lawmaking authority delegated by the Legislature, and that it is reasonably necessary to implement the purpose of the statute, judicial review is at an end.” (Yamaha Corp. of America v. State Bd. of Equalization (1998) 19 Cal.4th 1, 10–11 (Yamaha); see Gov. Code, § 11342.2 [implementing regulations adopted pursuant to statutory authorization must be “consistent and not in conflict with the statute and reasonably necessary to effectuate the purpose of the statute.”].) When a regulation is challenged on the ground that it is not “reasonably necessary to effectuate the purpose of the statute, ” our inquiry is confined to whether the rule is arbitrary, capricious, or without rational basis (Yamaha, supra, 19 Cal.4th at p. 11 & fn. 4) and whether substantial evidence supports the agency’s determination that the rule is reasonably necessary (Gov. Code, § 11350, subd. (b)(1)).

At the same time, when an implementing regulation is challenged on the ground that it is “in conflict with the statute” (Gov. Code, § 11342.2) or does not “lay within the lawmaking authority delegated by the Legislature” (Yamaha, supra, 19 Cal.4th at p. 10), the issue of statutory construction is a question of law on which a court exercises independent judgment. (See American Coatings, supra, 54 Cal.4th at p. 460.) In determining whether an agency has incorrectly interpreted the statute it purports to implement, a court gives weight to the agency’s construction. (See id. at p. 461 [“How much weight... is ‘situational, ’ and greater weight may be appropriate when an agency has a ‘ “comparative interpretive advantage over the courts, ” ’ as when ‘ “the legal text to be interpreted is technical, obscure, complex, ...

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