W. States Petroleum Ass'n v. Bd. of Equalization, S200475

• Decision Date: 05 August 2013
• Docket Number: S200475
• Parties: WESTERN STATES PETROLEUM ASSOCIATION, Plaintiff and Respondent, v. BOARD OF EQUALIZATION, Defendant and Appellant.
• Court: California Supreme Court

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

S200475

SUPREME COURT OF CALIFORNIA

Date Filed: August 5, 2013

Ct.App. 2/8 B225932

Los Angeles County

Super. Ct. No. BC403167

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 assessedas 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.

I.

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 areaunder 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 othermachinery 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,...