Everything Warren Buffett: SACRAMENTO BEE: Private jet companies file suit over property taxes on planes

Sunday, May 3, 2009

SACRAMENTO BEE: Private jet companies file suit over property taxes on planes

JILL CONNELLY/Special to The Bee A private jet lands at Van Nuys Airport in Southern California area last month. Shared ownership of such planes is sparking a tax battle.

By Christian Berthelsen

LOS ANGELES – Hollywood, with its bevy of stars and moguls who love nothing more than exclusivity and have the cash to obtain it, has become a hotbed for companies that operate fleets of private jets for businesses and wealthy individuals.

The companies cater to clients able to pay as much as $3 million apiece for a share in a jet, entitling them to the luxury of private flight over cattle-call commercial.

But there is one cost these companies are apparently not willing to bear: property taxes on their planes.

The companies, including industry leader NetJets Inc., a division of Warren Buffett's Berkshire Hathaway Inc., have filed four lawsuits in Orange and Santa Barbara counties against assessors who have begun collecting taxes on the planes for the first time under a law signed by Gov. Arnold Schwarzenegger in 2007 creating a framework for the levies.

The amount of revenue at stake is estimated to be about $10 million per year statewide, about a third of it going to Los Angeles, where the wealthy glide in and out of town on gleaming Cessnas, Gulfstreams and Learjets.

Though the sum could be considered negligible in county budgets that run to multiple billions of dollars per year, officials say every little bit helps – especially in a down economy that has already hurt public coffers.

"It's a challenging economic environment for all taxpayers," said Chriss Street, Orange County's treasurer-tax collector, who was named as a defendant in one of the lawsuits but has since been removed. "It's ironic that those with the most money are suing over taxes on their private jets. When jet-setters fail to pay taxes, it's local governments and schools that are hurt the most."

In Orange County, the roughly $680,000 the county estimates it would receive in tax revenue from the planes would pay the salary of 60 teachers, Street noted. In Los Angeles, the $3.2 million in estimated revenue would pay for 29 nurses, 32 sheriff's deputies or 40 social workers, according to county Supervisor Zev Yaroslavsky's office.

An analysis by the state Board of Equalization estimated that an additional $37.8 million could be collected statewide for retroactive assessments dating back to 2002. Under a complex formula apportioning revenue to counties based on takeoffs and landings, Sacramento County could expect about $650,000 for the 2008 tax year.

The jet companies have evolved over the last two decades to cater to clients with enough resources to buy a share of a private plane, but who can't – or don't want to – buy a whole plane outright. In the so-called "fractional jet" industry, owners buy anywhere from one-16th to half ownership of a plane and share it with other co-owners. They also pay monthly management fees to the operating company, as well as fuel and other in-flight costs. Owners don't necessarily always fly on the same plane; if theirs is in use, the company will provide another, and they can also upgrade or downgrade to different planes for shorter or longer flights.

A one-16th share, which is the most common fractional ownership arrangement, can cost anywhere from $425,000 to $3 million depending on the plane, and entitles the co-owner to 50 hours of flying time per year. Most of the co-owners across the industry tend to be public and private companies, though wealthy individuals make up about a quarter of the market.

As the industry has grown, it has cut into the lucrative first-class and business-class operations of commercial airlines.

Full owners of private planes, as well as commercial airline companies, have long paid property taxes on their planes, but until now the state and counties had not come up with a method of taxing the fractional plane owners.

The counties estimate there is $4.8 billion worth of aircraft subject to the taxation and say the method of assessments is similar to those already used on private and commercial aircraft. It imposes a 1 percent tax on the value of an aircraft fleet when one of its planes lands in California, under a formula that determines how much the planes use California facilities.

"Very clearly, it's not fair for them not to be taxed in California," said Rick Auerbach, the Los Angeles County assessor, who has taken a lead role in developing assessments for the fractional jet industry. "Everyone else is paying property tax when they're here. They should also."

The companies have paid the taxes and hope to recover them through the courts. The companies say the state's method for imposing the taxes is unconstitutional and unenforceable, because it imposes the burden of paying the taxes on the jet-operating companies rather than on the fractional owners of the planes – a departure from how California counties historically have assessed property taxes.

They also say the plan could result in multiple jurisdictions taxing the same plane ownership and that the tax assessment formula is written so broadly that it would impose tax on planes that never even cross California airspace.

California was the first state in the nation to develop a system for taxing the fractional planes. The lawsuits are being closely watched by the industry to see whether the taxation efforts will be upheld, inspiring other states and counties across the nation to follow suit.

The four major jet companies, which also include CitationShares Management, a division of Cessna Aircraft Co, based in Greenwich, Conn., and Flight Options, based in Cleveland, and Bombardier Aerospace Corp. of Richardson, Texas, which manufactures the Learjet and operates fractional jet company Flexjet, are closely held and don't reveal specific financial results.

Evidence has surfaced in lawsuits and elsewhere suggesting the business is only marginally profitable and may often lose money.

"The burden (the tax plan) imposes on fractional operators is certainly a steep one," said aviation lawyer Stephen Hofer of the Los Angeles-based Aerlex Law Group, who often represents celebrities and studio chiefs in private plane transactions. "It doesn't mean that it's wrong, but in an industry where profitability is elusive at best, this is another challenge fractional providers don't need."

NetJets, of Woodbridge, N.J., paid nearly $11,000 to Capitol lobbying powerhouse Nielsen, Merksamer, Parrinello, Mueller & Naylor in 2007 to oppose the jet-tax bill as it worked its way through the Legislature, state records show.

Parent company Berkshire Hathaway's annual disclosure to shareholders released in March said NetJets suffered lower earnings in 2008, particularly in the last three months of the year as the economy deteriorated but did not disclose specific results.

NetJets created the fractional jet concept and now performs 390,000 flights per year in 173 countries, with 700 aircraft in its fleet. The company counts Tiger Woods and General Electric Co. among its clients, as well as Schwarzenegger, who commutes on a NetJets plane between his Brentwood home and the Capitol or some other locale nearly each weekday.

A Berkshire spokeswoman did not return a call seeking comment, and a NetJets spokeswoman declined comment.

NetJets' lawyer in its lawsuit against Orange County, Alejandro Mayorkas, a former U.S. attorney in Los Angeles who is now a partner at O'Melveny & Myers, did not return a telephone call seeking comment.

The lawsuits were filed within several weeks of each other last summer, all making similar claims that it was illegal to assess the plane operators rather than the fractional owners, that the retroactive assessments for past years are illegal and that the plan would tax planes that don't make significant use of California facilities.

NetJets and Flight Options filed suit against Orange County; Bombardier and CitationShares filed suit against Santa Barbara.

The counties say the assessments are legitimate under state law, which allows them to tax any entity that "owns, controls or has possession of" particular property.

Because the operating companies have records of individual ownership, as well as the flight records showing how frequently those planes were used in California, tax officials say the companies are the most logical entity to handle the taxes – particularly since the owners don't always use the same plane.

"It's like a shell game," said Marie LaSala, a deputy county counsel in Santa Barbara who has been designated to handle that county's litigation with the jet companies. "We feel we're not treating them any differently than we would any other property owner. We just don't think it's fair that they evade taxation by playing hide-and-go-seek with us."

Related Links

Share Investor Blog - Stockmarket & Business commentary
Share Investor New Zealand Business News- Get more business news
Discuss this topic @ Shareinvestor.net.nz
Share Investor's Daily Forex Updates