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LIV,J.
WESTERN STATES PETROLEUM
ASSOCIATION,
Plaintiff and Respondent,
Vv.
CALIFORNIA STATE BOARD OF
EQUALIZATION,
Defendant and Appellant.
Case No.
FEB 29 2012
L fe GF edt ak wi Ph con neshim engente FY pers om en Bea
Second Appellate District, Division Eight, Case No. B225932
Los Angeles County Superior Court, Case No. BC403167
The Honorable Robert L. Hess, Judge
PETITION FOR REVIEW
KAMALA D. HARRIS
Attorney General of California
DAVID S. CHANEY
Chief Assistant Attorney General
FELIX. LEATHERWOOD
Supervising Deputy Attorney General
BRIAN D. WESLEY
Deputy Attorney General
State Bar No. 219018
300 South Spring Street, Suite 1702
Los Angeles, CA 90013
Telephone: (213) 897-5754
Fax: (213) 897-5775
Email: Brian.Wesley@doj.ca.gov
Attorneysfor Appellant
State Board ofEqualization
TABLE OF CONTENTS
Page
ISSUES PRESENTED FOR REVIEW .....ccccccsecsssssssesseeeeeseseseseesecneeseeaens ft
STATEMENT OF THE CASE... ccccccseseeeeeeeees seeseeeeneeeenenslieeecceeeseenersas 2
REASONS FOR GRANTINGTHEPETITION wu... ccc cecccseesseeseeeneeeeees 6
I. REVIEW SHOULD BE GRANTEDTO SETTLE
THE QUESTION REGARDING THE STANDARD
THAT SHOULD GUIDE AGENCIES WHEN
PREPARING AN ECONOMIC IMPACT
STATEMENT, AND ALSO WHETHER THE
BOARD HASTHE DISCRETION TO DETERMINE
THE APPROPRIATE APPRAISAL UNIT FOR
DIFFERENT TYPES OF REAL PROPERTY..............c000 6
A. The Court of Appeal’s Opinion that Rule 474 is
Inconsistent with Section 51(d) Underminesthe
Board’s Discretion to Instruct County Assessors
on the Marketplace’s Definition of an Appraisal
UNI. eeeec cenecseeecscesseeesecnseeeseeeeseeeesesssssuesessneessaneegs 6
B. The Court of Appeal ExceededIts Jurisdiction
by Imposing a HigherStandard for the
. Preparation of an Economic Impact Statement
Needed for the Board’s Adoption of a
Regulation, in Violation of the Plain Language
of Government Codesections 11346.3,
11346.5, and 11350, subdivision (b)(2)...........c:c6 13
CONCLUSION00. cccceeseesecsesecneeseeeecnecsesnesessessasseseeseaecenesaetareaesaeeats 18
TABLE OF AUTHORITIES
Page
CASES
California Assn. ofMedical Products Suppliers v. Maxwell-Jolly
(2011) 199 CalApp.4th 286 oo... ccccccccsccsseseessetsesseceeeessesseecsesseteseess 13, 15
City ofLong Beach vy. Department ofIndustrial Relations
(2004) 34 Cal.4th 942 oociccscceneessessceseesecssesssecsaeseestecssesseseessessscecneees 9
Exxon Mobil Corp. v. County ofSanta Barbara
(2001) 92 Cal.App.4th 1347 oo. cccccccsssesssssessecseesssecteccssesecssessesasesseseessees 11
Lopez v. Superior Court
(2010) 50 Cal.4th 1055 oo. eeeeeesseseeeceeeesesnienssenerseerenssseagernssnesees 8
People ex rel. Younger v. Superior Court ofAlameda County
(1976) 16 Cal.3d 30 ooo. ecccceecccsseccssceseesseeseeseeessesessesesseseessatensessesseessresas 12
Pulaski v. Occupational Safety & Health Stds. Bd.
(1999) 75 Cal.App.4th 1315ccc eceesectcseessecsetecsesseessecsssesseseseecseees 14, 15
Smith v. Superior Court
(2006) 39 Cal.4th 77 oo. cccecececsccenseesecssesseessesesecsseseessseseesssaesieeeessesensees 8,9
State Bd. ofEqualization v. Board ofSupervisors
(1980) 105 Cal.App.3d 813 oe‘sean sansserononesanssanensesttcrensenennernsenensnees 13
REGULATIONS
Cal. Code Regs., Title 18
8 BDA eececceserecsceesesesnseesesssenseegeesesestsecseseesssessauecstessesseseressesessees 7,9, 11, 12
SOLeccecccsceseeecseeseetesnecnsesaneesseserecsecsnesseecseesnesseseaeeseeeesesensseseseesreviteess 3
§ 461 SUD. (6)... ec ccccsseccssecceseseessseeesessesesaeceesssesssseeeessseeescseeessaeeesens 3,17
§ 468eecceeeseenteenececeeecceecnecstaeesecereesaeeneceesesseesaeesseseeentesareeesenseeneces 11
§ 409eccccecnececevseeseeeeeseeseecaeeeeaeesecnaeessesaeseaeesseeesseatessuteneessesseesapenss 11, 12
§ ADB .cccccsscecsssecssstescssucsesssesecssesecssucessvesessasessivecsssessssssssssesesseeeatetsaneeseaves 11, 12.
STAeeeeeeeeneecescnsetsecceeesnanecteaecseescaeesaesseeesteseeesesareteeesiaeenestaas passim
§ 474 subd. (d)(2)..... ee eecceeeeeeeenceseeeceteseccseeseeesenseessaseseaeeteess 3,4, 5, 12,17
il
STATUTES
Civ. Code, §§ 660, 657-663 oo... ceccccccccssssseesssecscseseseeecsssssssescseavsvscscevsvsvsneesavacanes 8
Gov. Code
§ 11346.3oiecceeceeseeseeseesseseseecssccsssessecessssssceavevsevaseressrsaeesecens 2, 13, 15,18
§ 11346.3, subd.(a)
§ 1346.5.eeceeesetessessecsesecsecseescacseceacecsussecesonstsansvsavasvaceusaners 12, 13,15
§ 11346.5, subd. (a)(8) oo... ceecccsescesessessescesseesscssecsecscsucesesvessscvaservattevaueaaeaes 14
§ 11346.5, subd. (€)(9) occeccessssesssesccsessesesssecsesscsucssscsesscaecstaceavevevsutarsess 17
§ 11350, subd. (D)cececceescsecsecscsesscessssssvseevsessceseacsaessvsessucatacersueaaesnens 2
§ 11350, subd. (b)(2).....ccccecesecccesesessesscssesnesveveveveveensdeedeeecaseesseecaeees 13, 16
§ 11370 et SOQ.ce cecccecsscsecererssseseeseetseeees Vaseesseceeaeeeseenesegetssnaeestnaeeessteneaaaes 5
8 15606...eeeeeeeceeesenecseeseesescescssevsvseesecsesececsecsevssssssevseravaevsevaveveeseasaeaasns 9
§ 15606, subds. (C) & (€) iececcccccccseseseesecssvscsesescssssvsessssevsenensaces 1, 2, 10, 12
BSGOeceenecsseseessecseeseesecsenscesecssssessecssegaressvsssesevevsesaeaesesereeaaens 17
Rev. & Tax. Code
SS Dacecccscccssecssessssessssessssvesssuscsuessssseasecersueceausssssesssusstessssusssisesssesssvesssssersesesaeee 3
$51, SUD. (a).eeeeceseseseeesscssecscsecsescsecsessecusssssersustersseasaevareavseessuesatens 1
$1, Subd. (8)(2) icc cccscecesssssccsecsesscseecescscssscessssaseceassessacerevatersreseass 3,11
$51, SUDA. (A)eeeecsecsseseessccscsessessescsevevssecessvessaceasenssaseneesaceuceeespassim
$110, SUDA. (a)...ecceccccecsensesssececsesessesatsssecssestsevsssscesssssevasevaceeeaees 3,11
CONSTITUTIONAL PROVISIONS
Cal. Const., Article XIII
SLieceecneceseecseesseessssesesesessetslessesesseevavessuvsssessessnensesessseseaevereesstaaeenses 3,7
§ 1, SUDA. (€). cc cceccccessseseesceetessescecsesssesecscscevsessvassecanavasasaveevevavesecsrsenesanens 11
Cal. Const., Article XIII A,
See eeeccessccnsecnsecteeeecesesseseresesesseccseesseesecnarecststesesusensevsrtsetateseeeaneates 2,3, 6,7
§ 2, SUBGIVISION (D) oo... cece cccccscesesseseesesessessscseseceasenenaverecarseacsaceevatsateratesaees 1
li
UnderCalifornia Rules of Court, rule 8.500, subdivision (b)(1),
appellant State Board. of Equalization petitions for review of a published
decision of the Court of Appeal, Second Appellate District, Division Eight,
issued on January 19, 2012.
ISSUES PRESENTED FOR REVIEW
The California Constitution requires the Board to follow the
marketplace to determine the taxable value of real property when the fair
market value of the property declines below its base year value. (Cal.
Const., art. XIII A, § 2, subdivision (b) (“Proposition 8”),’ implemented in
Rev. & Tax. Code, § 51, subd..(a).) To promote uniformity throughout
the state in the assessmentof property for the purposes oftaxation,
Government Codesection 15606, subdivisions (c) and (e) require the Board
to issue regulations,rules, or instructions to guide county assessors on the
appropriate appraisal methodologies for different types of real property.
Like any otherstate agency, the Board must make an “initial-
determination” that a proposed regulation will not have a significant
statewide adverse economic impactdirectly affecting business. (Gov.
Code, §§ 11346.3, subd. (a) & 11346.5.)
' Proposition 8 (SCA No. 67), adopted in 1978, amended Proposition 13.
The issues presented are:
1. Whether the Opinion improperly constrains the Board’s ability
to perform its constitutional and statutory duties to guide county assessors
on appropriate appraisal methodologies by holding that the Board has no
discretion undersection 51, subdivision (d) to includefixtures with land
and improvementsasa single appraisal unit whenit is undisputed that
sales and purchases ofrefinery property in the marketplace normally
include fixtures together with land and improvementsin a single unit? (See
Cal. Const., art. XIII A, § 2; Gov. Code, § 15606, subds.(c) & (e); Rev. &
Tax. Code, § 51, subd. (d).)
2. Did the Court of Appeal exceedits jurisdiction by rejecting the
Board’s economic-impact estimate in contravention of the flexibility
allowed to administrative agencies by Government Codesections 11346.3,
11346.5 and, 11350, subdivision (b), since there is nothingin the
administrative record in conflict with the Economic Impact Statement?
STATEMENT OF THE CASE
The Legislature requires the Board to instruct county assessors on
the proper appraisal methodologies for different types of property. (Gov.
Code, § 15606, subds. (c) & (e).) To help guide county assessors in
appraisals of petroleum refineries, a special type of property, the Board
adopted “Rule 474” (Cal. Code Regs,tit. 18, § 474.) Rule 474 defines the
"real property" to be valued when appraising petroleum refineries as a
single appraisal unit, including land, improvements, and fixtures.
Specifically, Rule 474 rebuttably presumes that refinery property
constitutes a single appraisal unit for decline-in-value purposes, except
when measuring declines caused by disaster. (Cal. Code Regs., tit. 18, §
474, subd. (d)(2).)
Prior to the adoption of Rule 474, petroleum refineries’ fixtures were
considered separate “real property” under Rule 461, subdivision (e) (Cal.
Code Regs., tit, 18, § 461, subd. (e)), which defines fixtures as a separate
appraisal unit. But after hearing testimony from countyassessors,the
Board concludedthat Rule 461 violated both the fair-market or full-cash
valuation provisions of the California Constitution and the mandate of
Revenue and Tax Codesection 51, subdivision (a)(2)’ This was
determined becauserefineries normally are.bought and sold as a unit
| (including land, improvements, and fixtures) in the marketplace; whereas,
fixtures of most types of properties are sold as a separate unit in the
marketplace, which explains the continued existence of Rule 461 asit
applies to other types of properties. (Cal. Const. art. XIII, § 1, art. XIII A, §
2; Rev. &Tax. Code, §§ 51, 110, subd. (a).) The Board promulgated Rule
_ 474 to correct that problem.
* Hereafter,all statutory references are to the Revenue and Taxation Code
unless otherwise indicated.
Following the Board’s adoption of Rule 474, Western States
Petroleum Association (“Western States”), an organization of petroleum
refineries from the western United States, filed a complaint for declaratory
relief seeking to invalidate Rule 474. (1 AA 11.)° Western States alleged
that Rule 474’s inclusion offixtures, as a single appraisal unit with land and
improvements, is inconsistent with section 51, subdivision (d) (hereafter
section 51(d)) because its phrase “normally valued separately”refers to
fixtures.
Western States and the Board filed cross motions forsummary
judgment. (6 AA 1711; 8 AA 2284.) Thetrial court granted Western
States’s motion. (11 AA 3253.) Ina published opinion, the Court of
Appealaffirmed.’
The Court of Appeal held that section 51(d) was intended to provide
two separate definitions of real property. According to the Court of
Appeal, the first part of subdivision (d) refers to land and improvements by
defining real property as those appraisal units that the marketplace
commonly buys and sells as a unit. (Opn. at p. 18.) The other definition of
real property refers to fixtures because they are “normally valued
separately.” (Opn.at p. 20.) The Court of Appeal reasoned that these
separate definitions were enacted by the Legislature to ensure that property
> AArefers to Appellant’s Appendix
* A copy ofthe opinionis attached hereto.
owners couldmaximize depreciation. (Opn. at p. 18.) The appellate court
held that Rule 474’s single-appraisal-unit presumption is inconsistent with
Propositions 8 and 13, because thoseinitiatives were intended to preserve
the appraisal methodologies used prior to their adoption. (Opn.at pp. 19-
20.)
In a concurring opinion, Justice Rubin expressed his doubts about
the appellate court’s conclusion that Rule 474 was inconsistent with section
51(d). (Opn. at p. 29, fn. 1.) But he concurred in the judgment, because of
his agreement with the holding that the Board’s economic impact statement
did not comply with the California Administrative Procedures Act
(CAPA”). (Gov. Code, §§ 11370 et seq.) (Opn.at p. 29.)
The Court of Appeal also held that the Board violated the APA
becauseit failed to provide sufficient evidence to support its conclusion
that the adoption of Rule 474 would not have asignificant economic impact
on petroleum refineries. The Court of Appeal was unfairly critical of the
Board’s preparation of its economic impact statement. (Opn.at pp. 24-25.)
The Court of Appeal held that the APA requires the Board to provide actual
and not estimated figures when attempting to estimate the economic impact
of Rule 474. (/d. at p. 25.)°
° Effective January 1, 2012, are new APA requirements concerning the
Economic Impact Statement, in particular with respect to regulations with
(continued...)
REASONS FOR GRANTING THE PETITION
I. REVIEW SHOULD BE GRANTED TO SETTLE THE
QUESTION REGARDING THE STANDARD THAT
SHOULD GUIDE AGENCIES WHEN PREPARING AN
ECONOMIC IMPACT STATEMENT, AND ALSO
WHETHER THE BOARD HASTHE DISCRETION TO
DETERMINE THE APPROPRIATE APPRAISAL UNIT
FOR DIFFERENT TYPES OF REAL PROPERTY.
A. The Court of Appeal’s Opinion that Rule 474is
inconsistent with Section 51(d) undermines the Board’s
discretion to instruct county assessors on the
marketplace’s definition of an appraisal unit.
This case presents anissue offirst impression about the
interpretation of section 51(d). The Court of Appeal’s interpretation will
prevent the Board from fulfilling its duty to provide instructions to county
assessors for proper appraisals of different types of property based on the
“marketplace,” which is not limited to refinery properties. The court’s
ruling improperly limits the Board’s discretion to adopt appraisal units that
follow the marketplace’s approach to fair market valuation, an approach
required byarticle XIII A, section 2 of the California Constitution
(“Proposition 8”). The Court of Appeal’s misinterpretation of section 51(d)
permanently makes petroleum refinery fixtures a separate appraisal unit,
becausethe decision forces the Board to maintain the treatment offixtures
(...continued)
an impact of over $50 million (defined as major regulation). (See 2011 Cal
ALS 496; 2011 Cal SB 617; 2011 Cal Stats. ch. 496.)
that existed prior to the passage of Propositions 13 and 8, as determined by
the Court, irrespective of the fact that there is no evidencethat any refinery
fixtures were treated as a separate appraisal unit prior to the adoption of
Propositions 13 and 8. (Opn, at p. 21.)
The concept of the marketplace setting the proper appraisal unit is
already established by section 51(d), ‘as interpreted by Rule 324 (which is
unchallenged here), Rule 474 doesnot set or establish that principle. In
fact, Rule 474 does not mandatethatall refinery real property be assessed
as a single unit, but merely sets a burden of proofinfavorof the unit
assessmentofall refinery real property thatis rebuttable. Thus, when the
court finds that refineries cannot be assessed as a unit (which include
fixtures) it goes beyond California law and conflicts with the constitutional
fair market valueprinciple. (Cal. Const., art. XIII, § 1 & art, XIll A, § 2)
1. The Court of Appeal’s holding that Rule 474 is inconsistent with
section 51(d) results from its misinterpretation of that statute. Specifically,
the Court of Appealinterprets section 51(d)’s phrase “normally valued
separately” as referring to fixtures. (Opn.at p. 20.) The court rejected the
Board’s argumentthat the plain meaning of section 51(d) provides the
Board with discretion to adopt appraisal units based on the marketplace.
(Opn.at p. 20.)
Importantly, the Court of Appeal’s interpretation violates two
principles of statutory construction:first, by making the phrase “persons in
the marketplace” mere surplusage; and, second, by readinginto the statute
the word “fixtures.” (See Lopez v. Superior Court (2010) 50 Cal.4th 1055,
1066 [held that interpretation of a statute rendering some words surplusage
is to be avoided]; Smith v. Superior Court (2006) 39 Cal.4th 77, 83 [applied
canon ofstatutory construction that courts must give significance to every
word in a statute].)
Section 51, subdivision (d) reads:
For purposesofthis section, "real property" means that
appraisal unit that persons in the marketplace commonly buy
and sell as a unit, or that is normally valued separately.
The Court of Appeal’s interpretation artificially separates section 51(d),
into two separate and fixed types of appraisal units, Underthat mistaken
interpretation, the first part of section 51(d) defines “real property” as an
appraisal unit that includes land, and improvements. And, the court
reasoned, the second part of section 51(d), after “or,” defines “real
property” as an appraisal unit that only includes fixtures. (Opn. at p. 18.)
This interpretation ignoresfirst, that “real property” consists of land,
improvements, andfixtures (Civ. Code, §§ 660, 657-663); and, second, the
disjunctive “or,” which provides the Board the discretion to examine the
“marketplace”so it can determineifthe real property should be valued as a
unit or valued separately. Instead of following the plain meaning ofsection
51(d), the Court of Appeal’s erroneousinterpretation inserts the word
“fixture” into the statute. That word, however, is found nowherein section
51(d), nor is it found anywhereinthe entire statute. (Smith v. Superior
Court, supra Cal.4th at p. 83.)° This interpretation will effectively remove
the Board’s statutory powerto ever adopt a single appraisal unit
methodology, and thereby eliminate the marketplace as the touchstone for
defining real property.
The court’s decision also completely ignores Rule 324, cited by the |
Boardand unchallenged by Respondent, which interprets section 51,
subdivision (d) as follows:
An appraisal unit of property is a collection of assets that
functions together, and that persons in the marketplace
commonly buy andsell as a single unit or that is normally
valued in the marketplace separately from other property, or
that is specifically designated as such by law. (Cal. Code
Regs., tit. 18, § 324, subd. (b), italics added.)
In accordance with the authority granted by the Legislature (Gov.
Code, § 15606), the Board provides guidance to county assessors on the
proper “appraisal unit” for various types of properties that is based on how
the property transfers in the marketplace. (See Cal. Code Regs., tit. 18, §
324.) .The Court of Appeal essentially took this authority away from the
Board, and madeits own determination of the proper appraisal unit. This
© Although the Court bears the ultimate responsibility for construing section
51, subdivision (d), the court’s interpretation also ignores the interpretive
canon that courts should grant great weight to an agency’s interpretation of
its governing statutes. (City ofLong Beach v. DepartmentofIndustrial
Relations (2004) 34 Cal.4th 942, 951.)
will have a detrimental effect on the Board’s ability to ensure that
properties are valued at fair market value — as constitutionally required.
Thus, the Court of Appealruling may havea detrimental impact on
other cases going beyondthe scopeof this litigation. In fact, the Court of
Appeal was awareof the impactof its holding whenit states that its
interpretation of section 51(d) is an issue of overriding “public
importance.” (Opn.at p. 22, fn. 10.)
2. By holding that fixtures must always be a separate appraisal unit,
the Court of Appeal’s misinterpretation conflicts with the legislative intent
that the Board mustinstruct county assessors on the different characteristics
of property. (Gov. Code, § 15606, subds. (c) & (e).) A report by the 1979
Joint Task Force, which was charged with implementing Propositions 13
and 8, explained that the use of fair market value is required when
conducting decline-in-value valuations under Proposition 8. The Task
Force report states that Proposition 8 addresses those situations where the
? Gcproperty’s “actual market value,” is less than the Proposition 13 cap on
value. (7 AA 2076.) “Actual market value”is the phrase specifically used
in the Task Force Report for Proposition 8, which supports the conclusion
that the market value principle continues to apply when Proposition 13
limits do not. In fact, this interpretation of Proposition 8 is mandatory
under the California Constitution pursuant to the fair market valuation
principle set forth therein, and has been confirmedby othercourts. (See,
10
e.g., Cal. Const. art. XIII, § 1, subd. (a) [“AIl property is taxable and shall
be assessed at the same percentageof fair market value”]; State Bd. of
Equalization v. Board ofSupervisors (1980) 105 Cal.App.3d 813, 822.)
Section 51 codifies the fair market value approach becauseit values real
property at its “full cash value,” which is synonymouswith “fair market
value” in section 110. (Rev. & Tax. Code, §§ 51, subd. (a)(2) & 110,
subd.(a).)
The Court of Appeal’s ruling not only contradicts legislative history
but creates inconsistency in existing Board regulations. The Court of
Appeal held that the Board does not have the powerto determine an
appraisal unit that “lumps together” fixtures with land and improvements,
because it will prevent taxpayers from taking a maximum depreciation
deduction. (Opn. at p. 18.) The opinion thus contradicts Board Rules 468,
469, and 473, which the Boardeither adopted subsequentto the passage of
Propositions 13 and 8, or which require the use of a single appraisal unit
including fixtures. (See Exxon Mobil Corp. v. County ofSanta Barbara
(2001) 92 Cal.App.4th 1347, 1355; Cal. Code Regs., tit. 18, §§ 468, 469,
473.) As stated above, a similar conflict with Rule 324 is created by the
opinion, which specifically states that the marketplace determines the
proper appraisal unit.
Rule 324 remainsa valid regulation, and is consistent with the fair
market value principle of the California Constitution. The Court of Appeal
ll
did not even address Rule 324 in its decision. Thus, the Court of Appeal’s
interpretation of section 51, subdivision (d) creates an unacceptable
inconsistency in the Board’s regulatory scheme. (People ex rel. Youngerv.
Superior Court ofAlameda County (1976) 16 Cal.3d 30, 42 [Court refused
to follow Attorney General’s interpretation becauseit created disharmony
in the statutory scheme].) Rules 324, 469, 473 and, Rule 474, subdivision
(d)(2) were adopted based on the Board’s consistent interpretation of
section 51, subdivision (d) and Government Codesection 15606,
subdivisions (c) and (e) that the Board has the discretion to adopt appraisal
units based on the marketplace. |
Further, the Court of Appeal is attempting to prevent the Board from
adopting valuation methodologies that differ from those applied prior to the
adoption of Proposition 13. (Opn. at p. 18.) In order to meetits
constitutional and statutory obligations, the Board must be allowed to adopt
new valuation methodologies to account for changing marketplace
circumstances.
12
B. The Court of Appeal exceededits jurisdiction by
imposing a higher standardfor the preparation of an
economic impact statement needed for the Board’s
adoption of a regulation, in violation of the plain
language of Government Codesections 11346.3, 11346.5,
and 11350, subdivision (b)(2).
The Court of Appeal’s decision conflicts with California Assn. of
Medical Products Suppliers v. Maxwell-Jolly (2011) 199 Cal.App.4th 286.
There,the First Appellate District held that the adoption of a new
regulation that changed the calculation of Medi-Cal reimbursementrates for
medical suppliers complied with the economic impact statement
requirements of Government Codesection 11346.5. The Court of Appeal
held that the agency did not violate the APA whenit relied on its own
summary statements without estimating whetherthe regulation would have
an economic impact for Medi-Cal providers. (California Assn. ofMedical
Products Suppliers, supra, 199 Cal.App.4th at p. 312.) In contrast, the
Court of Appeal here ruled that the Board’s estimate of the economic
impact was inadequate becauseit did not use actual figures in determining
the tax impact for a representative petroleum refinery.’ (Opn.at p. 24.)
Theeffect of the Court of Appeal’s ruling is to require a state agency in
rulemaking procedures to provide an exhaustive analysis with respect to
"In discussing the requirementofusing a “representative”business, the
Court of Appeal confuses and conflates subdivisions (a)(8) [economic
impacts] and (a)(9) [cost impacts] of section 11346.5 of the Government
Code. There is no mention of using a “representative” business in the
economic impact subdivision (a)(8).
13
“each” impacted taxpayer, while ignoring the fact, discussed below,that
actual figures may not lawfully used in a public rulemaking hearing without
violating taxpayer confidentiality.
The Court of Appeal’s decision imposes obligations not required by
the plain statutory language of Government Codesection 11346.5,
subdivision (a)(8), which only requires an agency to producean“initial”
determination of the economic impactof a regulation:
Ifa state agency, in adopting, amending, or repealing any
administrative regulation, makes an initial determination that
the action will not have a significant, statewide adverse
economic impactdirectly affecting business, including the
ability of California businesses to compete with businesses in
other states, it shall make a declaration to that effect in the
notice of proposed action....
The Legislature’s use of “initial determination” means that an agency does
not have to conduct an extensive analysis of the potential economic impact.
Thus, the Board, like other agencies, can rely on reasoned estimates. (See
Pulaski v. Occupational Safety & Health Stds. Bd. (1999) 75 Cal.App.4th
1315, 1328-1329, 1336.) The statute intentionally grants agencies
flexibility when estimating a regulation’s economic impact. But the Court
of Appeal’s decision threatensto limit, if not to eliminate, an agency’s
discretion in making initial determinations about a regulation’s economic
impact.
For example, Government Code section 11346.5, subdivision (a)(8)
provides a broad range of evidence that an agency can rely on, such as ©
14
“facts, evidence, documents, testimony, or other evidence upon whichthe
agency relies to support its initial determination.” Nevertheless, the Court
of Appeal held that an economic impact statement cannot use estimates to
determine the projected costs. (Opn. at p. 27.) The Court of Appeal held
that a proper economic impact statement must have determinedthefixture
depreciation for each representative refinery. (Opn.at p. 25.) Thisis,
however, contrary to the requirements of the APA, which does not require
| that depth of analysis for the initial determination in rulemaking.
There is no statutory requirement to conduct an in-depth assessment
to determine every possible impact of a proposed regulation. (California
Assn. ofMedical Products Suppliers v. Maxwell-Jolly (2011) 199
Cal.App.4th at. pp. 307-308.) An agencyis only required to do an initial
‘ analysis, which necessarily will involve projections, because an agency
cannot knowfor certain what the exact impact will be ofa future
regulation. (Pulaski v. Occupational Safety & Health Stds. Bd., supra,
75 Cal.App.4th at p. 1329 [court upheld agency’s estimationof cost to
comply with new ergonomics control measures].)
Not only did the Court of Appeal ignore the Legislature’s intentas
reflected in Government Codesections 113463 and 11346.5; the court also
ignored Government Codesection 11350, subdivision (b)(2). Under that
statute, a regulation maybeinvalidated onlyif there is “substantial
evidence”in the record that conflicts with the agency’s finding that the
15
regulation will not have a significant economic impact. (Gov. Code, §
11350, subd. (b)(2).) Here, the only evidence in the record supports the
Board’s economic impact statement. (1 AA 113-114; 3 AA 626-627; 3 AA
635-636; 3 AA 643-644.) Indeed, the only contrary evidencein the
rulemaking file was an unsupported statement by Western States, an
industry lobbying organization that estimated the impact at $5 - $10 million
annually, rather than the $1.4 million estimated by the Board. (2 AA 368.)
This decision will have an adverse effect on the administrative
rulemaking process by encouraging interested parties to avoid participating
in the rulemaking process, and then subsequentto the adoption of a new
regulation, challenge the Board’s (or other adopting agency’s) economic
impact statement in court in an attempt to invalidate the regulation. But
here, even Western States’ estimate supports the Board’s conclusion that
Rule 474 will not have a significant economic impact to an industry with
over $32 billion in refinery property. (3 AA 626-627.)
In addition, the Court of Appeal confuses the requirements of the
APAwith respect to “cost” under Government Codesection 11346.5 ,
subdivision (a)(9), and “economic impact” under Government Code section
11346.5, subdivisions (a)(7) and (a)(8), by equating the two to mean the
same thing. Government Codesection 11346.5, subdivision (a)(9),
however,refers to the cost of compliance, such as additional recordkeeping
requirements, and not economic or tax impact of the proposed regulation.
16
Therefore, the requirements under Government Codesection 11346.5,
subdivision (a)(9) are irrelevant to the Board’s estimated $1.4 million
annual tax impact. Yet, the Court of Appeal erroneously states that: “The
EIS [Economic Impact Statement] leaves a reader without an understanding
of what the taxes on a representative refinery would have been under the
formerly applicable Rule 461(e), and what the taxes would be under the
new Rule 474(4)(2).” (Opn. at p. 25; see Gov. Code, § 11346.5, subd,
(a)(9) [an agencyshall evaluate the costs to be incurred by a
“representative” business affected by a proposed regulation].) As noted
above, there is no mention of a “representative” business in Government
Codesection 11346.5, subdivision (a)(8) with respect to economic or tax
impacts.
Moreover, to satisfy the APA requirements for an economic impact
statementas interpreted by the appellate court in this case, the Board is
being required to provide a revenue impactfor a “representative” business
that arguably could result in the Board revealing confidential taxpayer
information in violation of privacy and confidentiality laws. (See Gov.
Code, § 15619.)°
® Government Code section 15619, subdivision (a) prohibits the
Board of Equalization’s Board Members, employees or agents from
divulging any information concerning the business affairs of any company
“that is gained during an examination of its books and accounts or any
other manner.”
17
The Court of Appeal’s ruling promotes a standard for preparing an
economic impact statement that contradicts the APA becauseit forbids the
use of economicprojections in an activity that necessarily relies on those
very projections. (Gov. Code, § 11346.3.)
CONCLUSION
For the foregoing reasons, the Board respectfully requests that this
Court grant review of the decision of the Court of Appeal.
Dated: February 28 , 2012 Respectfully submitted,
KAMALAD. HARRIS
Attorney General of California
DAVID 8S. CHANEY
Chief Assistant Attorney General
FELIX E. LEATHERWOOD
Supervising Deputy Attorney General
BRIAN D. WESLEY thy
Deputy Attorney General
Attorneysfor Appellant
State Board ofEqualization
LA2010503433
CA Supreme Court (2 Party) (W).doc
18
CERTIFICATE OF COMPLIANCE
I certify that the attached PETITION FOR REVIEW usesa 13 point
Times New Romanfont and contains 4536 words.
Dated: February 28, 2012 KAMALAD. HARRIS
‘Attorney General of California
O Whe
BRIAN D. WESLEY
Deputy Attorney General
Attorneysfor Appellant
State Board ofEqualization
DECLARATION OF SERVICE BY U.S. MAIL
Case Name: Western States Petroleum v. California State Board of Equalization
Los Angeles County Superior Court Case No.: BC403167
California Court of Appeal Case No.: B225932
California Supreme Court Case No.:
I declare:
I am employedin the Office of the Attorney General, whichis the office of a memberof the
California State Bar, at which member's direction this service is made. I am 18 years of age or
older and not a party to this matter. I am familiar with the business practice at the Office of the
Attorney General for collection and processing of correspondence for mailing with the United
States Postal Service. In accordance with that practice, correspondence placed in the internal
mail collection system at the Office of the Attorney General is deposited with the United States
Postal Service with postage thereon fully prepaid that same day in the ordinary course of
business.
On February 28, 2012, I served the attached PETITION FOR REVIEWbyplacing a true copy
thereof enclosed in a sealed envelope in the internal mail collection system at the Office of the
Attorney General at 300 South Spring Street, Suite 1702, Los Angeles, CA 90013, addressed as
follows: .
C. Stephen Davis, Esq. - The Honorable Robert Leslie Hess
Cris K. O’Neall, Esq. Los Angeles County Superior Court
Andrew W.Bodeau,Esq. Central District, Stanley Mosk Courthouse
CAHILL, DAVIS & O'NEALL, LLP 111 North Hill Street
Cris K. O'Neal, Esq. Department 24, Room 314
550 S. Hope Street, Suite1650 Los Angeles, CA 90012
Los Angeles, California 90071
Clerk, Court of Appeal
Second Appellate District, Division Eight
300 South Spring Street, 2nd Floor
Los Angeles, California 90013
(Hand-delivered)
I declare under penalty of perjury underthe laws of the State of California the foregoing is true
and correct and that this declaration was executed on February 28, 2012, at Los Angeles,
California.
Kathi Palacios ihED
7 Vv ~
Declarant “Signature
LA2010503433
6073474 1.doc
Filed 1/19/12
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATEDISTRICT
DIVISION EIGHT
WESTERN STATES PETROLEUM B225932
ASSOCIATION,
(Los Angeles County
Plaintiff and Respondent, Super. Ct. No. BC403167)
V.
STATE BOARD OF EQUALIZATION,
Defendant and Appellant.
APPEALfrom a judgment of the Superior Court of Los Angeles County,
Robert L. Hess, Judge. Affirmed.
Kamala D. Harris, Attorney General, Paul D. Gifford, Senior Assistant Attorney
General, Felix E. Leatherwood, W. Dean Freeman, and Brian D. Wesley, Deputy
Attorneys General, for Defendant and Appellant.
Cahill Davis & O’Neall, C. Stephen Davis, Cris K. O’Neall and Andrew W.
Bodeaufor Plaintiff and Respondent.
For more than 25 years, the State Board of Equalization (SBE) directed county
assessors to assess the value of the “real property” at petroleum refineries by applying
valuation formulas generally applicable to all industrial and manufacturing properties.
(See Cal. Code Regs., tit. 18, § 461.) Then, responding to entreaties from a numberof
county-level governmentofficials, SBE concluded that it had become necessary to adopt
new valuation formulas uniquely applied to petroleum refineries. (See Cal. Code Regs.,
tit. 18, § 474 (hereafter Rule 474).) The current litigation by the Western States
Petroleum Association (WSPA) followed. WSPA filed a complaint for declaratory relief
that Rule 474 was invalid for several reasons, including that SBE had violated various
requirements of the Administrative Procedures Act (APA; see Gov. Code, § 11340 et
seq.) in adopting Rule 474 and/or that Rule 474 was inconsistent with constitutional law
(see Cal. Const., art. XIITA) and statutory law (see Rev. & Tax. Code, § 51, subd. (d)).
On materially undisputed facts presented in the context of cross-motions for summary
judgment (MSJ),thetrial court declared Rule 474 invalid, and entered judgment in favor
of WSPA. SBEappeals. Weaffirm.
FACTS
Background: The Valuation ofReal Property
From California’s earliest days, its residents and business enterprises have pursued
their economic activities and expectations in light of the constitutional principle that “‘all
property in this state shall be taxed in proportion to its value, to be ascertained as directed
by law....’” (State Bd. ofEqualization v. Board ofSupervisors (1980) 105 Cal.App.3d
813, 820, quoting Cal. Const. of 1849, art. XI, § 13.) This constitutional principle
remains in influence in present times. (See Cal. Const., art. XIII, § 1, subd. (a) [“All
property is taxable... .”].) At the same time, however, the defining orclassifying of
what constitutes “real property,” or “tangible personal property,” or any other cognizable
property interest subject to taxation,is largely a legislative and/or regulatory function, as
is the establishmentofthe rules that prescribe the formulas by which the value of real
property or other types of taxable property is to be determined. Created by state
constitutional amendmentin 1879, SBE is an elective body with the authority, amongits
other powers, to assure that real property assessment practices — i.e., valuation formulas
— are equalized and made uniform acrossourstate so that real property owners share the
load equally when it comestime to pay their real property taxes. (See Cal. Const., art.
XII, §§ 17, 18; and see also Gov. Code, § 15606.)
The issues in case before us today grow outof the valuation intricacies involved
when assessors assess the value of the real property at an industrial or manufacturing
property. These valuation intricacies involve the interplay between valuing the land,
valuing the improvements, i.e., buildings and structures, and valuing the fixtures on the
site such as machinery and equipment, which are more-or-less affixed. As a general
proposition, the definition of real property for purposes of ad valorem real property taxes
encompassesall three of the components noted in the previous sentence. (See Rev. &
Tax. Code, §§ 104, 105; and see generally Morse Signal Devices v. County ofLos
Angeles (1984) 161 Cal.App.3d 570, 577.) The noted interplay is the result of the long-
recognized accountingrealities that fixtures typically depreciate in value year-to-year,
whereas land and improvements typically appreciate in value year-to-year, the last few
years of our state’s history notwithstanding.
As best as we are able to discern from the parties’ briefs on appeal and the
appellate record, assessors for many years leading up to the late 1970’s assessed the value
of land and improvements as one appraisal unit, and assessed the value offixtures as a
separate appraisal unit in order to account for depreciation. And, it appears from the
appellate record that while the owner of a manufacturing or industrial property may have
received a single real property tax bill each year, the bill would have beenthe reflection
of an assessed value for land and improvements, and an assessed value for fixtures.
The total assessed value ofthe real property would then be computed by adding the two
distinct appraisal units, with the ad valorem real property tax then imposed onthe total
assessed value. As a result of the practice of applying these separate appraisal units
valuation formulas, the value of the fixture-related appraisal unit of an industrial or
manufacturing property would, in the absence of the addition of new fixtures, decline
each yearto reflect depreciation. This means that the amountofreal property taxes
attributable to fixtures would also decline.’
In June 1978, the voters of California adopted Proposition 13 (Prop. 13), adding
article XIIIA to the California Constitution. Broadly summarized, Prop.13 restricts the
“maximum amount of any ad valorem tax on real property” to a prescribed percent of the
“full cash value of such property,” and requires that the “full cash value” of real property
be measuredas ofthe time of acquisition. (See art. XII[A, § 1.) This acquisition value is
commonly knownasthe base year value. Prop. 13 also limits any year to year increase in
the base year value to a prescribed inflation factor, not to exceed two percent per year.
(See art. XIIIA, § 2). In short, Prop. 13 changed ourstate’s real property tax system from
a system based on the current market value ofreal property, to a system based on the
acquisition value of real property, plus an allowable, trended or indexed increase over
time. Basically, that means that real property owners do not pay property taxes on
unrealized or non-monetized increasesin the value of their real propertyas it is defined
under the law. After Prop. 13, as it was before,the task of classifying or defining what
constitutes real property for purposes of any ad valorem real property tax, as well as the
adoption of formulas by which the value of a taxable unit of such real property is to be
computed, largely remainsa legislative and/or regulatory function, but restricted by
Prop. 13.
' Anydecline in taxes associated with a decline in the value ofthe fixture-related
appraisal unit would not necessarily meanthat the total property tax bill would decline.
If the value of the appraisal unit for land and improvements increased, and the increased
taxes associated with the land and improvements appraisal unit outpaced any decline in
taxes associated with the fixtures appraisal unit, then the overall tax bill would increase.
2 All references to article XIIJA are to that article of the California Constitution.
4
In its original, initiative version, Prop. 13 contained no language on the subject
of what would occur when the market value of real property declined belowits trended
or indexed taxable value — its Prop. 13 value — dueto a disaster or economic
conditions. In November 1978, the voters of California addressed this issue by adopting
Proposition 8 (Prop. 8), which amended Prop. 13. Prop. 8 provides that the taxable
trended or indexed value of real property enrolled on an assessor’s books,its Prop. 13
value, may be adjusted downto reflect its actual fair market value whenthe actual fair
market value of the property declines below its taxable trended or indexed value,i.e., its
Prop. 13 value, due to a disaster or economic conditions. (See art. XIIIA, § 2, subd. (b).)
After the voters of California adopted Prop. 13 and Prop. 8 in the 1978 elections,
the Legislature formed a task force to study the implementation of the new real property
tax system mandated underthe propositions. In January 1979, the task force submitted a
report and recommendationsto the Assembly Committee on Revenue and Taxation, the
so-called “Task Force Report.” The Task Force Report is well-recognized as a statement
of legislative intent for purposes ofthe interpretation of the statutes enacted to implement
Prop. 13 and Prop. 8. (See, e.g., Auerbach v. Assessment Appeals Bd. No. 1 (2006)
39 Cal.4th 153, 161.)
Among its myriad elements, the Task Force Report recommendedthat any statute
governing the formulas to be used for determining whether a particular taxable unit of
real property had suffered a decline in value should be based on a continuation of the then
widely-followed practice of assessing the value of real property by the appraisal unit
approach. In the words of the Task Force Report: “... [T]he purpose of Prop. 13 wasto
place a cap on the value of [real] property in any one year, while Prop. 8 sought to allow
the values [of real property] to rise and fall withoutrestriction at any point below this
cap, should actual market values so dictate. [{] The purpose of the ‘appraisal unit’
conceptis to ensure that these increases or declines in value be measuredin the same
manneras such property was appraisedprior to Prop. 13.” (Italics added.)*
Effective July 1979, the Legislature enacted a number of Revenue and Taxation
Codesections to implementthe property tax system mandated by Prop. 13 and Prop.8.
(See Stats. 1979, ch. 242, p. 506.) Within this legislation, Revenue and Taxation Code
section 51 prescribes the formulasfor fixing the two real property value figures which are
to be compared in determining whether a decline in value has occurred.’ It provides that
an assessor should comparethe actual current market value of a particular unit of real
property against its enrolled “Prop. 13 value” in order to determine whether the former
figure is less than thelatter figure, thus evidencing a decline in value.
Undersection 51, subdivisions (a)(1) and (a)(1)(D), the Prop. 13 value ofreal
property as ofthe lien date (a given tax year), is its “base year value, compounded
annually since the base yearby an inflation factor” which in “no event shall. . . exceed 2
percent of the prior year’s value.” Under section 51, subdivision (a)(2), the current
market value ofreal property as of the lien date, is measuredas its “full cash value [in the
event it was exposedfor sale in an open market transaction in which neither the buyer or
seller had an unfair advantage] ..., taking into account reductions in value due to
3 The Task Force’s recommendation was eminently sensible. In enacting Prop. 13
to render changeto.the tax system on real property, the voters presumably had in mind
the then-existing definition of real property, and the then-existing methods for valuing
real property, and they voted to constitutionally restrict taxes on real property within such
a framework. If definitions and valuation formulas could be changedat will by the
Legislature, or regulators, it would underminethe voters’ clear intent to restrict taxes on
real property as then defined and valued. In summary, an ownerofa taxable appraisal
unit of real property before Prop. 13 could expect that he or she would receive the benefit
of restricted taxes on the same “appraisal unit” of “real property” after Prop. 13.
4 All references to section 51 are to that section of the Revenue and Taxation Code.
damage,destruction, depreciation, obsolescence, removal of property, or other factors
causing a decline in value.”
This brings us to section 51, subdivision (d),° which provides: “For purposes of
this section [governing the valuation of real property in a decline-in-value examination],
‘real property’ meansthat appraisal unit that persons in the marketplace commonly buy
and sell as a unit, or that is normally valued separately.” (Italics added.) Here ends our
historical review ofthe constitutional and statutory underpinnings of the current case.
SBE andIts Regulations
Asnoted above, SBEtries to equalize and make uniform throughoutthe state the
real property assessment practices employed by assessors. To that end, SBE adopts rules
that “govern assessors whenassessing ....” (See Cal. Code Regs., tit. 18, § 1.) In 1979,
after the voters adopted Prop. 13 and Prop. 8, and after the Legislature enacted statutes to
implementthe tax system which wasconstitutionally-mandated by the propositions, SBE
adopted California Code of Regulations, title 18, section 461 (hereafter Rule 461).’ From
then until now, Rule 461 has prescribed (with exceptions that are discussed below) the
valuation formulas that are to be applied when determining “real property value changes”
resulting from a “purchase, change of ownership or a decline in value.” From 1979 to the
present day, Rule 461 has remained materially the same, with minor changes that mostly
deal with format.
° The “taking into account” language includedin section 51, subdivision (a)(2), is
interesting. On the one hand, we cannotlightly disregard the language as meaningless.
(Manufacturers Life Ins. Co. v. Superior Court (1995) 10 Cal.4th 257, 274 [statutory
interpretation should not render any part of a statute meaningless].) On the other hand,
all of the expressly cited elements found in section 51, subdivision (a)(2), would appear
to be factors which would be considered in any event by a buyerandseller, without
regard to any statute, in a hypothetical sale of a property in a fair, open marketsale.
6 Hereafter, section 51(d).
7 All references to Rule 461(e) are to Rule 461, subdivision(e).
7
Rule 461(e) provides: “Declines in values will be determined by comparing the
current lien date full value of the appraisal unit [1.e., its value in the event it was exposed
for sale in a fair, open market transaction] to the indexed base year full value of the same
unit [i.e., the taxable value of the appraisal unit as measured and enrolled under Prop. 13]
for the current lien date. Land and improvements constitute an appraisal unit .... For
purposesof this subdivision,[i.e., for purposes of determining a decline in value] fixtures
and other machinery and equipmentclassified as improvements constitute a separate
appraisal unit.” (Italics and underscoring added.)
An “Assessors’ Handbook” issued by SBE in October 2002 explains Rule 461 in
these terms: “Measuring declines in value can be simple when only one appraisal unitis
involved. Fixtures, for example, as a separate appraisal unit are valued at current market
value on the lien date and at the indexed base year value[1.e., the Prop. 13 value], and the
lowervalueis enrolled.” The Assessors’ Handbook then explains that, when measuring
declines in values “in a total property appraisal” situation, 1.e., where land and buildings
are examined in an appraisal unit, and fixtures are examined in a separate appraisal unit,
the task “may become moredifficult” because each appraisal unit must be examined
“separately.” The Assessors’ Handbook provides a decline in value example in which the
land and buildings are examinedas an appraisal unit (“Unit 1’) and measuredby a current
market value ($575,000) and a Prop. 13 factored or indexed base year value ($185,000),
with the lower figure ($185,000) enrolled as the assessed value of that appraisal unit. In
the example, fixtures are examined as a separate appraisal unit (“Unit 2”) and measured
by a current market value ($40,000) and a Prop. 13 factored or indexed base year value
($52,000), with the lower figure ($40,000) enrolled as the assessed value ofthat appraisal
unit. The example concludesby calculating a total assessed property value consisting of
“Unit 1 + Unit 2” which measuresin at $225,000 ($185,000 for land and improvements
and $40,000 for fixtures).
In September 2006, after Rule 461 had been applied to petroleum refineries for
more than 25 years, SBE’s board members voted 3-2 to adopt Rule 474 to address
specifically “the valuation of the real property, personal property, and fixtures used for
the refining of petroleum.” In December 2006, SBE submitted Rule 474 to the Office of
Administrative Law (OAL) for review. In February 2007, SBE withdrew its submission.
In April 2007, SBE resubmitted Rule 474 to the OAL. In June 2007, the OAL rejected
Rule 474 upon determining that SBE’s “Initial Statement of Reasons” (ISR) whyit was
adopting the rule (see Gov. Code, § 11346.2, subd. (b)) was inadequate. In September
2007, SBE submitted Rule 474 with a revised ISR. SBE thereafter submitted a “Final
Statement of Reasons,” including two addenda. (Gov. Code, § 11346.9.) Broadly
summarized, SBE’s Final Statement of Reason’s for Rule 474 is the agency’s official
proclamation that it had determined it was necessary to adopt a special rule applicable to
petroleum refineries in order to implement Prop. 8’s decline in value provisions correctly.
In November 2007, the OAL approved Rule 474 for transmittal to the Secretary of
State and publication in the California Code of Regulations. Rule 474 becameeffective
in December 2007.
Rule 474
Rule 474 reads:
“(a) The provisions of this rule apply to the valuation ofthe real
property, personal property, and fixtures used for the refining of petroleum.
“(b) General.
“(1) The unique nature of property used for the refining of petroleum
requires the application of specialized appraisal techniques designed to
satisfy the requirements ofarticle XIII, section 1, and article XIILA, section
2, of the California Constitution. To this end, petroleum refineries and
other real and personal property associated therewith shall be valued
pursuantto the principles and proceduresset forth in this section.
“TH. - [0
“(c) Definitions For the purposes ofthis section.
9
“TG... U9
(2) ‘Appraisal unit’ consists ofthe real andpersonalproperty that
personsin the marketplace commonly buy andsell as a unit.
“(d) Declines in Value. For the purposesofthis section:
“(1) Declinesin value of petroleum refining properties will be
determined by comparingthe currentlien date full value of the appraisal
unit [i.e., its value in the eventit was sold in an open markettransaction] to
the indexed base yearfull value [i.e., the Prop. 13 value] of the same unit.
“(2) The land, improvements, andfixturesand other machinery and
equipment classified as improvementsfor a petroleum refining property are
rebuttably presumedto constitute a single appraisal unit. ...
“(3) In rebutting this presumption, the assessor may consider
evidencethat:
“(A) The land and improvements including fixtures and other
machinery and equipmentclassified as improvements are not under
common ownership or control and do nottypically transfer in the
marketplace as one economic unit; or,
“(B) Whenthe 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 economicunit.” (Italics
added.)
SBE’s Final Statement ofReasons (FSR) for Rule 474
SBE’s FSR for the adoption of Rule 474, inclusive of two addenda, summarizes
the public comments received by SBE during the rule-making process,® andsets forth
SBE’s responsesto those public comments, along with SBE’s analysis and reasons for
The “rule-makingfile” for Rule 474, submitted to the trial court for review in
connection with the cross-MSJs, ostensibly contains the “record” of the rule-making
process,i.e., the underlying testimony and written submissions, received and complied
by SBE.
10
adopting Rule 474. SBE’s FSR showsthat representatives from the petroleum refining
industry, including WSPA,voiced opposition to Rule 474 during the rulemaking process.
Summarized, the industry representatives’ asserted reason against a special valuation
methodology applicable to petroleum refinery properties was that such properties should
not be considered unique from other manufacturers, such as breweries or sawmills, for
purposesofassessing the taxable value of “real property.” Further, that Rule 474 would
violate Prop. 13, Prop. 8, and section 51(d). As one industry representativetestified:
At an oil refinery, raw material goesin, it’s heated, and a finished product comesout; at a
brewery, raw material goesin, it’s heated, and a finished product comesout.
Onthe other side of the aisle, SBE heard from governmentrelated and aligned
witnesses, including a number of county assessors, who offered testimony and written
submissions showing that the land, improvements, and fixtures at a petroleum refinery is
typically bought and sold as “a single unit” in the marketplace. In other words, a buyer
ordinarily would not buy the land and improvements apart from a refinery’s piping and
heating and other refining equipment, and would not buya refinery property and then
dismantle its refining equipment and convert the land and improvementsto a different
purpose. Theassessors further testified that a predominantpart of the value ofa refinery
is in its fixtures, that is, the refining machinery, andthat this differentiates refineries from
other manufacturing industries, where the opposite is typically the situation. As one
assessor explained by an example: The valueat a refinery is in its fixtures, whereas, at a
“cannery operation,”the “value is typically in the land andin the structures.” Essentially,
the assessors proffered the proposition that refineries should not be allowed to claim a
“decline in value” on fixtures (equipment) as a separate appraisal unit based on
depreciation because the value of the land, improvements andfixtures would be better
fixed by lumpingall these elements together and viewing them as single appraisal unit.
There was no evidence that market factors affecting refineries had changed between the
1970’s and 2000’s.
11
As noted above, SBE’s FSR includes its conclusion that it was “necessary”to
adopt Rule 474 to comport with assessors assessmentpractices to section 51, subdivision
(d), and to the decline in value provisions ofProp.8, i.e., article XTIIA, section 2,
subdivision (b).
The Litigation
In December 2008, WSPAfiled a complaint challenging Rule 474’s validity by
way of four causes ofaction: first, it sought declaratory relief that SBE had violated the
APAin adopting Rule 474 because the rule was inconsistent with constitutional law
(Prop. 13) and statutory law (section 51(d)), and not necessary to implement suchlaw;
second,it sought declaratory relief that Rule 474 violated Prop. 13’s cap on year-to-year
increases in assessed valueofreal property; third, it sought declaratory relief that Rule
474 violated Prop. 13’s requirement for a two-thirds vote of the Legislature for raising
real property taxes; and the fourth sought declaratory relief that Rule 474 violated
petroleum refiners’ constitutional right to equal protection and uniformity of laws.
In October 2009, SBE and WSPAfiled cross-motions for MSJ. Reducedtoits
essence, WSPA’s MSJ argued that Rule 474’s treatment of the land, improvements and
fixtures at a petroleum refinery as a single “appraisal unit” in valuing the refinery’s
“real property” was inconsistent with section 51(d). WSPA also argued that, by changing
the methodology for valuing a refinery, Rule 474 caused an increase in real property
value, and, thus, an increase in property taxes, in violation of Prop. 13. SBE’s cross-MSJ
arguedthat it had the authority under Prop. 8 and section 51(d) to treat the land,
improvements andfixtures at petroleum refineries as a single “appraisal unit” in the
decline-in-value context.
On March 29, 2010,the trial court entered a minute order and extensive statement
of reasons granting WSPA’s MSJ. On April 27, 2010, the court entered judgmentin
favor of WSPAin accord with its order granting summary judgment. The court’s
judgment includes these declarations concerning the validity of Rule 474:
“.. Rule 474is invalid for the following reasons:
12
“1. Rule 474 does not meet all six of the criteria in Government
Code section 11349.1[, subdivision] (a). A thorough review ofthe
Rulemaking File, taken as a whole, persuades the Court that the necessity,
authority, consistency and reference prongs have not been met;
“2. Government Codesection 11349.1[, subdivision] (d)(2),
requires that [SBE] comply with Government Codesection 11346.3. The
Economic Impact Statement prepared by . . . SBE does not comply with
this requirement because the calculation of costs contained therein bears no
relationship to the actual effect of the change from the Rule 461
methodology to the Rule 474 methodology, and also because ... SBE did
not determine the cost (tax) that a representative refinery would necessarily
incur in reasonable compliance with the new rule (Gov. Code, § 113465.5[,
subdivision] (a)(9)), but instead .. . SBE attempted to determine the
cumulative economic impact of the new rule based on the aggregate
assessed value of all California refineries;
“3. Rule 474is inconsistent with . . . section 51 because it omits a
material portion of the statutory definition of ‘appraisal unit’ (“normally
valued separately’)... and fails to fully account for reductions in value
due to depreciation and obsolescenceor otherfactors . . . by permitting
increases in land value to offset declines in fixtures value. Rule 474 is also
inconsistent with other regulations and procedures — notably Rule 461[,
subdivision] (e), predating section 51 — whichare consistent with
section 51.
“4. Rule 474,in purpose andeffect, violates article XIITA,
section 3, ... in that it is enacted for the purpose of increasing revenues by
meansof a change in the method of computation, without the necessary
vote of the Legislature ....” (Italics omitted.)
SBEfiled a timely notice of appeal.
13
DISCUSSION
I. The Deference Issue
SBE contends the judgmentin favor ofWSPA mustbe reversed becausethetrial
court “committed error by substituting its judgmentin place of [SBE’s judgment].”
Weunderstand SBEto arguethat thetrial court should have done nothing more than
review the rule-making file compiled in connection with SBE’s adoption of Rule 474.
Further, if the rule-making file contained substantial evidence supporting SBE’s
conclusion that it had becomenecessary and was reasonable to have a specific valuation
methodology applied to petroleum refineries, then the court should have confirmed the
validity of Rule 474. We disagree that the issue is as simple as SBEis trying to lead one
to believe.
As the Supreme Court has explained,“there are two categories of administrative
rules... .” (Yamaha Corp. ofAmerica v. State Bd. ofEqualization (1998) 19 Cal.4th 1,
10 (Yamaha).) “Quasi-legislative rules” represent a form of substantive lawmaking,
where an adopting agency “has been delegated the Legislature’s lawmaking power.”
(Ibid.) In such situation, “[b]ecause agencies granted such substantive rulemaking
powerare truly ‘making law,” their quasi-legislative rules have the dignity ofstatutes.”
(Yamaha, supra, at p. 10, italics added.) Giventhis “dignity,” when a court addresses the
validity of a quasi-legislative rule, the scope ofits review is “narrow.” Morespecifically,
if a court is satisfied a rule is within the lawmaking authority delegated by the
Legislature, and that there is support for the adopting agency’s conclusionthatthe rule is
reasonably necessary to implement the purposeof the controlling statute, judicial review
largely comes to an end. (/d. at pp. 10-11.) Narrow review, however,still depends on
context in that “even quasi-legislative rules are reviewed independently for consistency
with controlling law.” (Ud. at p. 11, fn. 4.)
The other category of administrative rule reflects an agency’s interpretation of a
controlling statute. (Yamaha, supra, 19 Cal.4th at p. 11.) Unlike quasi-legislative rules,
an agency’s adoption ofa rule interpreting a statute “does not implicate the exercise of a
delegated lawmaking power.” (/bid.) On the contrary, the agency’s action in adopting an
14
interpretative rule represents the agency’s legal opinion ofthe statute’s meaning and
effect, and those questions alwayslie in the end “within the constitutional domain ofthe
courts.” (/bid.) “Because an interpretation is an agency’s /egal opinion, . . . rather than
the exercise of a delegated legislative power to make law, it commands a commensurably
lesser degree ofjudicial deference.” (bid.)
With nothing more than a citation to Western States Petroleum Assn. v. Superior
Court (1995) 9 Cal.4th 559, 568 (Western States Petroleum Assn.), SBE argues Rule 474
is a “quasi-legislative”rule, and, as such, that it should have been subject only to narrow
judicial review which included a “strong presumption of regularity.” For a number of
reasons, SBE’s legal argumentis not helpful to us in addressing the correctness of the
trial court’s judgmentin the current case. First, Western States Petroleum Assn. was a
discovery and admissibility of evidence case decided under the California Environmental
Quality Act (CEQA);it did not involve a regulation adopted by SBE. In Western States
Petroleum Assn., supra, 9 Cal.4th 559, the Air Resources Board (ARB) adopted
regulations, and a petroleumindustry association sought administrative review afforded
under the CEQAforrepealof the regulations. (/d. at pp. 565-566.) The association then
brought an action for traditional and administrative mandatein the trial court as is proper
under the CEQA,where issues arose on whether the ARB’s decisions on adoption and
non-repeal of the regulations had been a “quasi-judicial” decision or a “quasi-legislative”
decision. The association also sought resolution of whether it would be allowed
discovery on matters not involved during the administrative rule-making process, and on
whetherthe association could introduce evidenceat trial of its mandate action in the court
from outside the administrative record. (/d. at pp. 566-579.) The Supreme Court ruled
that evidence from outside the administrative record in the CEQA-related mandate action
was not admissible in the trial court because the claims that the ARB hadfailed to
comply with CEQA were required to be decided based upon the materials included in the
administrative record. (/bid.)
15
After reading Western States Petroleum Assn., supra, 9 Cal.4th 559, we are not
persuaded that we must —as SBE seemsto argue — deem SBE’s adoption of Rule 474 to
have been a “quasi-legislative” action as a matter of law, with the appropriate standard of
judicial review attached accordingly. Apart from this, even assuming that SBE1s correct
that its decision to adopt Rule 474 wasa “quasi-legislative” action, it does not follow that
judicial review must end upon an examination ofthe rule-making file for substantial
evidence in support of SBE’s conclusionsthat it was reasonable for the agency to adopt
Rule 474. SBE hasnot persuaded usthat the trial court further erred in addressing the
issue of whether Rule 474 was “consistent” with overriding constitutional and statutory
law. (See Yamaha, supra, 19 Cal.4th at p. 11, fn. 4.) In other words, we depart with SBE
in its implicit proposition that it may “legislate” any rule or regulation that it desires, with
only limited judicial review, provided its actions are coated with a patina of
reasonableness. SBE may only adopt rules and regulations that are consistent with the
lawsofthis state. (See generally, Woods v. Superior Court (1981) 28 Cal.3d 668, 679.)
The record before us on appeal showsthetrial court properly addressed WSPA’s
allegation that Rule 474 wasinconsistent with governing statutory and constitutional law.
Again, assuming SBEiscorrectthetrial court made its own qualitative evaluation of the
reasonableness of adopting a regulation that prescribes specific valuation formulas for
petroleum refineries, this does not necessarily require that we reverse the judgmentin this
case. On the contrary, apart from any allegedly improper “re-weighing” of evidence in
this case affecting issues such as “necessity” or “reasonableness,” the predominant issue
remains whetherthetrial court correctly decided that Rule 474 wasinconsistent with
constitutional and statutory law. The correctness of the court’s determination is
discussed in more detail below. But at the outset, we reject SBE’s contention that the
judgmentin this case must be reversed becausethetrial court “fundamentally violated the
separation of powers doctrine” by acting as a legislative, rule-making body.
16
Because consistency with controlling law is the predominantissuein this case,
weare not persuadedto reverse the judgment based upon SBE’s argumentthat the trial
court’s review should have been completed as soon as it eyed substantial evidence in the
rule-makingfile supporting SBE’s conclusion that adopting Rule 474 was reasonable.
Il. The Statutory Consistency Issue
SBE contends the judgment in favor of WSPA must be reversed because thetrial
court erred in declaring Rule 474 to be inconsistent with statutory law. Wedisagree.
A. The Governing Law
An administrative agency may not adopt a regulation unless it is consistent with
the statutes being implemented or interpreted. (See Gov. Code, § 11342.2; and see, e.g.,
Woods y. Superior Court, supra, 28 Cal.3d at p. 679; Nortel Networks, Inc. v. Board of
Equalization (2011) 191 Cal.App.4th 1259, 1276-1277.) Stated in other words, where
administrative regulations conflict with acts of the Legislature, the regulations are void,
and “no protestations that they are merely an exercise of administrative discretion can
sanctify them.” (Morris v. Williams (1967) 67 Cal.2d 733, 737.)
Whena court is presented with a dispute whether a regulation is consistent with
statutory law, the court’s task is to determine whether the regulation conflicts with the
overriding legislative mandate. (Woods v. Superior Court, supra, 28 Cal.3d at p. 679.)
In examining whethersuch a conflict exists, a court is not required to give deference to
the adopting agency’s interpretation of the statutory law in question; instead, the court
independently interprets the pertinent statutory law. (See, e.g., Aguiar v. Superior Court
(2009) 170 Cal.App.4th 313, 323.) In short, a court “does not... defer to an agency’s
view when deciding whether a regulation lies within the scope of [the agency’s]
authority .... The court, not the agency, has ‘final responsibility for the interpretation
of the law’ under whichthe regulation was issued.” (Yamaha, supra, 19 Cal.4th at p. 11,
fn. 4.) With these principles in mind, we turn to SBE’s appeal.
B. Analysis
Section 51(d) provides that, in determining if there has been a decline in value of
real property within the meaning ofarticle XIIIA, section 2, subdivision(b), 1-e., within
17
the meaning of Prop.8, “‘real property’ means that appraisal unit that persons in the
marketplace commonly buyandsell as a unit, or that is normally valued separately.”
(Italics added.) In light of the assessment practices which existed at the time section
51(d) was enacted, and inlight the legislative history (predominantly the Task Force
Report) showing the Legislature intent to carry forward existing assessment practices
under Prop. 13 and Prop.8, the second definition of “real property” found in section
51(d) — ie., “that appraisal unit that is normally valued separately” — meansthat
fixtures shall be assessed as a separate appraisal unit of real property because they were
at the time of the adoption of section 51(d) “normally valued separately” in order to
account for depreciation. Indeed, in its opening brief on appeal, SBE expressly concedes
that Rule 461(e) reflects SBE’s own consistent interpretation of section 51(d), covering a
period of decades,“to require that fixtures be treated as a separate appraisal unit.”
Rule 474, subdivision (d)(2)’ provides that, when it comes timeto assess the value
of a petroleum refinery’s defined real property in the “decline in value” context, the
“and, improvements andfixtures . . . for a petroleum refining property are rebuttably
presumed to constitute a single appraisal unit. ...” The rebuttable presumption created
by Rule 474(d) is not consistent with section 51(d). Under section 51(d), as consistently
interpreted and implemented by SBE through Rule 461 (e) for decades,the fixtures at a
“generic” industrial property shall be assessed as a separate appraisal unit within the
broader framework of real property because fixtures have always been “normally valued
separately” to account for depreciation. But, under Rule 474(d)(2), the fixtures at a
petroleum refinery are rebuttably presumed not to be a separate real property appraisal
unit. Thetrial court found that assessing the value of fixtures as a separate appraisal unit
and rebuttably presumingthat fixtures are not to be assessed as a separate appraisal unit
are inconsistent approaches. Weare not persuaded by SBE’s arguments on appealto find
they are consistent approaches.
° Hereafter, Rule 474(d)(2).
18
SBE’s arguments are based on the position thatit recently learned about the
unique marketplace characteristics of petroleum refineries which differentiate them from
other industrial or manufacturing properties. SBEtells us that, in conjunction with its
recent acquisition of the knowledge that petroleum refineries are unique, it also has come
up with a new interpretation of section 51(d) which would allow the valuation approach
established by Rule 474(d)(2) to be applied consistent with section 51(d). In the words of
SBE,it cameto realize that Rule 461(e) did “not fit every circumstance,” and, for this
reason, “simply changed”its prior interpretation of section 51(d) under which fixtures
were uniformly assessed as a separate appraisal unit.
In this vein, SBE argues that section 51(d) may be interpreted to require a market-
place approachto valuation in the “decline in value” context, depending upon the manner
in which the marketplace values a particular type of industrial or manufacturing property.
In short, SBE argues that section 51(d) commandsthat fixtures are not to be assessed as a
separate appraisal unit if the marketplace does not value fixtures separately. SBE further
argues that, because petroleum refineries are usually valued as a single unit in the market-
place, Rule 461(e) should be viewedas inconsistent with section 51(d)’s marketplace
approach insofar as petroleum refineries are concerned. Thus, according to SBE,it was
“obligated to adopt a new regulation” for petroleum refineries that was consistent with
section 51(d)’s marketplace approach. This then is the foundation for SBE’s conclusion
that adopting Rule 474 was “necessary.” As SBEseesit, section 51(d) says assess the
value of certain real properties based on the marketplace, but Rule 461(e) does notresult
in a true measure ofthe value of real property at petroleum refineries in the marketplace.
On the other hand, Rule 474(d)(2) will result in a true assessmentofthe value ofreal
property at petroleum refineries in the marketplace.
Underpinning SBE’s argumentis its interpretation that section 51(d) authorizes the
agency to exercise discretion “to choose the proper appraisal unit” from the two appraisal
units of real property which are defined in section 51(d) whenevera “a changing market-
place” makes one definition more reasonable than the other. As SBE’s argues: section
51(d) does not “specifically dictate how county assessors should appraise property for
19
decline-in-value purposes,” but rather, “give[s] assessors the ability to determine the
appropriate appraisal unit on a case-by-case basis.”
SBE’s argumentignores the history of assessment practices, including the history
of accounting for depreciation in fixtures, and ignores the legislative history of section
51(d). SBE’s suggestion that section 51(d) may be construed to mean that the value of
real property at one type of industrial enterprise may be assessed using a “sold as a single
unit” appraisal formula, while the value of real property at a different type of industrial
enterprise may be assessed by viewing the property as having separate parts, so-to-speak,
with a particular part, namely fixtures, valued separately whenit is normally segregated
in such a mannerin the marketplace, cannot be sustained whenthe legislative history is
examinedto shed light on the statute’s meaning. This is particularly true whenthere is
no evidencethat there has been an actual change in circumstances in the marketplace,
rather than merely a change in SBE’s perspective of the marketplace. Thelegislative
history of section 51(d) convinces us that the Legislature’s intent when it enacted the
section was not what SBE nowascribesto the section.
The legislative history of section 51(d) persuades us that the Legislature, in
enacting the section, did not intend to approvethe use of two,alternative and disjunctive
definitions of appraisal units of real property at the sole discretion of SBE. Instead, the
Legislature was acknowledging that the then-existing valuation formulas contemplated
valuing land and improvements as an appraisal unit, and valuing fixtures as a separate
appraisal unit to allow for depreciation, and it intended that these valuation formulas
would carry forward under Prop. 13 and Prop.8, particularly in the absence of evidence
of any changein circumstancesjustifying a change in valuation formulas. Giving such a
meaning to section 51(d) makes sense whenits historical context is remembered. In its
effort to implement Prop. 13 and Prop. 8 in accord with the voters’ intent, the Legislature
reasonably concluded that it was important that the valuation formulas existing before the
voters spoke would remain the same under the new tax system established by the voters.
In short, the voters’ conception of “real property” as it was defined and valued would
remain the same under the new real property tax system as it was underthe priorreal
20
property tax system in orderto assure that the restrictions imposed on real property taxes
would actually result in realized restrictions on real property taxes. The Legislature well-
reasonedthat, if the manner in which real property was understood and valued did not
remain constantin the transition from the prior real property tax system to the new real
property tax system, then the voters’ intended goal of restricting real property taxes might
prove elusive. SBE’s interpretation of section 51(d) essentially discards the statute’s
intent to fix in place the pre-Prop. 13 and Prop. 8 valuation formulas for real property.
Instead, SBE would interpret section 51(d) to allow for the adoption of new valuation
formulas by which the framework governing real property could be manipulated to avoid
the restrictions on real property taxes imposed by the voters when they approved Prop. 13
and Prop.8. |
SBE’s arguesthat its interpretation of section 51(d) — whichit will apply only to
petroleum refineries — is entitled to deference. We disagree for two reasons. Furst, the
interpretation of section 51(d) now proffered by SBE is not contemporaneous with the
enactment of section 51(d), and the agency’s new interpretation detours from SBE’s
long-standing interpretation of section 51(d) as evidenced by Rule 461(e). (Henning v.
Industrial Welfare Com. (1988) 46 Cal.3d 1262, 1278 [when an agency’s interpretation
of a statute is not contemporaneous with the statute’s enactment, and contradicts the
position which the agency had enunciated at an earlier date, close to the enactmentofthe
statue, it cannot commandsignificant deference].) Second, SBE is keepingits earlier
interpretation of section 51(d), as reflected in Rule 461(e), in place for industrial and
manufacturing properties save for petroleum refineries. SBE’s continuing belief in the
validity of its earlier interpretation of section 51(d) in our view further cuts against giving
deference to its new interpretation. Because SBE,in adopting Rule 474, adopted a new
regulation in conflict with section 51(d), no amountofprotestations that it is a reasonable
regulation will sanctify it."
10 Contrary to the assertion in the concurring opinion,this statutory consistency
analysis is by no means“dicta.” WSPAfiled a complaint seeking declaratoryrelief that
SBEhad violated the APA in adopting Rule 474 because, amongother claims, it was
21
III. The Economic Impact Statement (EIS) Issue
SBE contends the judgment must be reversed becausethe trial court erred in ruling
that SBE’s EIS did not comply with requirements of the APA. Wedisagree.
A. The Governing Law
Government Code section 11346.3, subdivision (a), provides that a state agency
proposing to adopt a regulation “shall assess the potential for adverse economic impact
on California business enterprises ....” In assessing the potential for adverse economic
impact, the adopting agency “shall consider the proposal’s impact on business, with
consideration of industries affected including the ability of California businesses to
compete with businesses in otherstates.” (Gov. Code, § 11346.3, subd.(a)(2).)
Government Codesection 11346.4, subdivision (a), provides that a state agency in
proposing to adopt a regulation shall submit a “notice of proposed action” to the OAL for
publication in a regulatory notice register. Section 11346.4, subdivision (a)(3), further
states that the adopting agencyshall distribute copies ofits notice of proposed action to
certain identified persons and businesses “likely to be affected” by the regulation.
Government Codesection 11346.5 prescribes the information that an adopting
agencyshall include in a notice of proposed action. Section 11346.5, subdivision (a)(8),
provides that, when an adopting agency “makesan initial determination that [a proposed
regulation | will not have a significant, statewide adverse economic impactdirectly
affecting business, including the ability of California businesses to compete with
businesses in other states, it shall make a declaration to that effect in the notice of
proposed action.” When makinga declaration of no significant adverse impact, the
inconsistent with section 51(d). Our decision in this area is therefore necessary to a full
decision on the merits and is binding precedent. (Bunch v. Coachella Valley Water Dist.
(1989) 214 Cal.App.3d 203, 212.) In addition, our determination that SBE’s existing EIS
is not an adequate informational document for purposes of showing the economic impact
of Rule 474 will not put an end to the overriding issue of public importance presented in
this case. In the event SBE hereafter resubmits an EIS which adequately informs the
public of the true economic impact of the new rule, the issue of whether SBE may adopt a
new formula for valuing petroleum refineries without conflicting with statutory law will
still remain.
22
adopting agency “shall provide in the record [the] facts, evidence, documents, testimony,
or other evidence” upon which the agencyrelied to support its declaration. (/bid.) Under
section 11346.5, subdivision (a)(9), the adopting agency’s notice of proposed action shall
include a description of“all cost impacts, known to the agencyat the time the notice of
proposed action is submitted to the [OAL], that a representative private . . . business
would necessarily incur in reasonable compliance with the proposed action.”
B. SBE’s EIS |
SBE’s EIS is prefaced with what mayfairly be described as a cover sheet. The
cover sheet indicates that the EIS had been approved by SBE’s chief counsel. The cover
sheet includes four sentences, largely mirroring language found in the APA, summarizing
Rule 474’s potential economic impact: “The cost impact on private persons or businesses
will be insignificant. [Rule 474] will not have a significant adverse economic impact on
businesses. [] [Rule 474] will not be detrimental to California businesses in competing
with businessesin other states. [§] [Rule 474] will neither create nor eliminate jobs in
the State of California norresult in the elimination of existing businessesor create or
expandbusiness in the State of California.”
Beneath the coversheetis a fill-in-the-blank, standardized state government form
(“Form 399”) entitled “ECONOMIC AND FISCAL IMPACT STATEMENT.” series
of check-marked boxes on this form indicate that Rule 474 “will impact businesses...”
(identified as 20 petroleum refineries); that no businesses will be created or eliminated
(“none”); that no jobs will be created or eliminated (“none”); and,finally, that the rule
will not affect the ability of California businesses to compete with other states by making
it more costly to produce goodsor services (“no”). In a section of the form reserved for
information regarding “Estimated Costs,” the words “See attachment” are typedin.
The referenced attachment,in its entirety, reads as follows:
“ECONOMIC AND FISCAL IMPACT STATEMENT ATTACHMENT
Section B
Petroleum refineries are projected to pay $1.4 million morein property
taxes in the first year of implementation with that amount increasing
23
annually. Compliance costs should not increase because mostrefinery
assessments are routinely appealed and appraisal and financial accounting
costs are already incurred. Petroleum refineries have similar assessed and
market values. Petroleum refineries do not change ownership frequently.
Fixtures typically decrease in value. Land typically appreciates in value.
Calculations
$32 Billion total assessed value ofrefineries
$25 Billion fixtures
$ 7 Billion land and non fixture improvements
x_.02 Maximum Prop 13 annual inflation factor
$.14 Billion in assessed value
x_.01 Basic tax rate
014 Billion in increased taxes
Section D
The proposedrule does not mandate the use of specific technologies or
equipmentor prescribes specific actions or procedures. Rule 474 changes
only the assessment schemeforfixtures used in refineries.”
C. Analysis
Thetrial court correctly ruled that SBE’s EIS failed as an informational document.
Generously construed, the EIS consists of a bald statement, devoid of any understandable
foundation, that Rule 474 would cause petroleum refineries to pay $1.4 million more in
property taxes in the first year of the rule’s implementation. The statement is without any
reference to supporting facts or evidence in the rule-making file. The “calculations”
providedarelittle more than a numbers dump, with no explanation ofhow or from where
the numbersare derived. It is not altogether clear in our view whether the numbers used
in the “calculations” reflect actual facts. Moreover, even if the accuracy of the numbers
is accepted, the calculations do not provide a comprehensible road map to follow to show
how Rule 474 will impact petroleum refineries in actual implementation. The EIS leaves
a reader without an understanding of what the taxes on a representative refinery would
24
have been under the formerly applicable Rule 461(e), and what the taxes would be under
the new rule Rule 474(d)(2). (See Gov. Code, § 11346.5, subd. (a)(9) [an agency shall
evaluate the costs to be incurred by a “representative business” affected by a proposed
regulation].) Alternatively, even an aggregated, industry-wide comparative analysis
(with estimated figures) under Rule 461(e) and Rule 474(d)(2) would have helpful to
understanding economic impact. SBE would have the public simply accept the agency’s
ultimate conclusion ($1.4 million) without the ability to evaluate the conclusion.
Apart from the vaguenessofthe EIS itself, we agree with WSPAthat the record in
this matter, i.e., the rule-makingfile, does not show that SBE’s actual underlying analysis
of the potential economic impact of Rule 474 was based on “adequate”facts as required
under the APA. (See Gov. Code, §§ 11346, subd. (a)(1); 11346.2, subd. (b)(4); 11346.3,
subds.(a), (b); 11346.5, subds. (a)(8), (a)(9); 11347.3.) We agree with the trial court’s
conclusion that SBE’s economic impact analysis lacked meaningful quantification of
Rule 474’s “real world” impact. That is, an economic impact based on data concerning
fixture depreciation on assessed values. SBEtells us the trial court’s conclusion is wrong
because “[t]here is no evidencein the record in conflict with [SBE’s EIS].” This may be
true, but SBE misses the point. Assuming SBEis correct that there is an “absence of
evidence”in the rule-makingfile conflicting with the final conclusionsin its EIS, it does
not follow that the trial court was required to give the EIS a passing grade. Thetrial
court’s better-focused examination looked for evidence in the record supporting the final
conclusions set forth in SBE’s EIS.
In its opening brief on appeal, SBE offers that it based its final conclusion upon a
determination that “$1.4 million... would represent[the additional tax, at the basic tax
rate of one percent, on] a potential increase in assessed value of $140 million spread over
a value base of approximately $32 billion.” What we believe SBEis saying is that the
$140 million in fixture value which otherwise would have been depreciated under 461,
would not be depreciated under Rule 474, and thus, would be subject to property taxes.
For the most part, SBE’s conclusion regarding Rule 474’s impact is found in a three-page
“dssue paper” or “revenue estimate” prepared by SBE’s Research andStatistics Section.
25
The issue paper explains Rule 474 in operation, and explains how its implementation
would affect assessed values, and it does so far more understandably than SBE’s EIS.
The issue paper presents model calculations projected over a six-year period which show
the difference in assessed values under rule 461 and 474. The problem with the issue
paper, however,is that it is largely hypothetical — the valuation data figures used in the
issue paper’s calculations are assumed. Moreover, the issue paperitself showsthat the
figures ultimately used in the calculations in SBE’s EIS (e.g., $25 billion total assessed
value) are not true figures based on real world assessed values. The issue paper expressly
showsthat total assessed values of petroleum refineries located in Los Angeles County
and Contra Costa County were compiled ($14 billion) and that this localized assessed
value figure was then “project[ed] . . . on a statewide basis” to come up with a total
assessed value of $25 billion forall of the refineries located in the state. It is unclear
what factor was applied to make the projection from $14 billion to $25 billion, and it
would appearthat the projection is based on the predicate that there is uniformity in the
size and composition of refineries as between Los Angeles County and Contra Costa
County on the one hand, and refineries located elsewhere. Assessed values will vary
depending on how longa refinery has held its existing base-year value and the amount of
assessable new construction it has undertaken and other factors. Changes in the values of
the elements which are input into the calculations under the formulas (depreciating
fixtures/removals and additions of fixtures/appreciating land) will change the end results
of the calculations.
Thetrial court was particularly concerned about SBE’s EIS andits underlying
analyses, and ordered a special hearing at which the parties were to explain whether SBE
disclosed accurate and sufficient information regarding the increased taxes to be expected
from Rule 474’s implementation. At the hearing, the trial court and SBE’s counsel
engaged in extensive exchangeson the court’s concern whether there was a real world
foundation for the assumed figures, including those for fixture depreciation that SBE had
employed to make its analysis. During these exchanges, the court expressly asked to be
pointed to the part of the record showing where such information existed; we do not see
26
an express answer. In the end, SBE’s counsel submitted that SBE had not been required
to undertake an economic analysis of the nature that the court was suggesting, and that
SBE’s “projections,” standing alone, were sufficient under the APA.
On appeal, SBE’s argument is similar. Rather than directly addressing WSPA’s
claims about the shortcomings of SBE’s EIS and the underlying analysis, SBE argues the
APAis intended to advanceparticipation in the rule-making process, and that, in SBE’s
words, so long asit satisfied the APA’s “basic minimum procedural requirements,” no
more was required. According to SBE, a “[fJailure to comply with every procedural facet
of the APA” does not meanthat an ensuing regulation is necessarily invalid. This is so,
says SBE, because the APA gives agencies “flexibility when preparing an economic
impact report.” SBE cites Pulaski v. Occupational Safety & Health Stds. Bd. (1999)
75 Cal.App.4th 1315, 1328, 1336. We agree with SBEin the abstract that the APA does
not require an adopting agency to comply with “exacting standards”in order to adopt a
regulation. We depart with SBEin its implicit proposition that flexibility in making
reasonable economic estimates and projects equates with hypothetical estimates and
projections.
In the final examination, we reject SBE’s argumentthatit satisfied Government
Code section 11346.5 merely by making this statementin its EIS: “The cost impact on
private persons or businesses will be insignificant.” In our view, the APA requires more
than mere statements that mirror the language of the APA. Public participation in the
rule-making process requires that an adopting agency show the foundation forits
conclusions, if only so that the foundation and conclusions may be subject to meaningful
scrutiny. SBE did notsatisfy this standard in adopting Rule 474.
V. Conclusion
Having foundthat the trial court correctly declared Rule 474 to be inconsistent
with section 51(d), we decline to address whetherthe rule is unconstitutional in thatit
also conflicts with article XIIIA. (Elkins v. Superior Court (2007) 41 Cal.4th 1337,
1357.) In addition, because we have concluded that SBE’s EIS for Rule 474 wasnot
27
adequate under the APA, wefind it unnecessary to address SBE’s remaining arguments
that it did not violate the APA in adopting the rule.
DISPOSITION
The judgmentis affirmed. Respondent is awarded costs on appeal.
CERTIFIED FOR PUBLICATION
BIGELOW,P.J.
I concur:
FLIER,J.
28
Western States Petroleum Association v. State Board of Equalization - B225932
RUBIN,J. - CONCURRING
I concur in the judgment.
The majority opinion rests on two separate holdingsto affirm thetrial court’s
grant of summary judgmentin favor of respondent Western States Petroleum
Association. I agree with the second ofthese holdings — that the trial court correctly
concludedthat California Code of Regulations,title 18, rule 474 (Rule 474) did not
comply with the Economic Impact Statement requirement of Government Code section
11346.3, subdivision (a). I thus agree with the majority’s analysis in Part II of the
opinion and would affirm the judgmenton that ground.
In my view the majority’s analysis of whether Rule 474 is consistent with
Revenue and Taxation Codesection 51, subdivision (d) is dicta and need not have been
considered in light of the court’s resolution of the Economic Impact Statement issue.
RUBIN,J.
I I do not believe we need to reach the issue of Rule 474’s compliance with the
applicable statute. But if I were to reach the merits, I have doubts whether Rule 474 has
run afoul ofthe statute. Rather than ignoring either part of the statutory test (bought and
sold as a unit/normally valued separately), Rule 474 makes a factual determination that
overthe years since the passage of Revenue and Taxation Code section 51, subdivision
(d), and earlier California Code of Regulations,title 18, Rule 461, it appears that
petroleum refineries are now being boughtand sold in one unit comprising real property,
improvements andfixtures. On that factual assumption, the new rule creates a rebuttable
presumptionthat refineries are sold in such a manner. Rule 474still requires individual
valuation based on how the marketplace actually functions, and, in my view, appears to
be consistent with the statutory language.
