Shafer v. State Board of Equalization

Citations: 174 Cal. App. 3d 423; 220 Cal. Rptr. 59; 1985 Cal. App. LEXIS 2752Docket: A028122

Court: California Court of Appeal; November 15, 1985; California; State Appellate Court

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In the case of W. Bruce Shafer et al. v. State Board of Equalization, 51 county tax assessors challenged provisions of the Revenue and Taxation Code enacted in 1983, specifically sections 75.10, 75.11, and 75.12, concerning supplemental assessment and delayed assessments on newly constructed properties. The Court of Appeals upheld these provisions as valid, determining that they did not impose new ad valorem taxes, but merely affected the timing of existing tax calculations, consistent with California Constitution, Article XIII A. This article limits local property taxes to 1% of assessed value and prevents additional local taxes without two-thirds voter approval. It established a base value from the 1975-1976 assessment unless there was a change in ownership or new construction. 

Prior to the enactment of chapter 3.5, properties were reassessed based on ownership changes or new construction only after a considerable delay, impacting tax equity. Chapter 3.5 aimed to eliminate this delay, allowing immediate adjustments to taxes upon changes in property value. The legislative intent was to enhance equity among taxpayers by ensuring that tax increases due to property reassessments were recognized promptly, thereby preventing an inequitable tax burden shift among taxpayers.

Under chapter 3.5, properties experience reassessment within the current fiscal year following increases in assessed value due to ownership changes or new construction, rather than waiting until the next year. This provision aims to equitably levy local property taxes by eliminating delays in property value adjustments. Plaintiffs contend it results in new taxes, but the argument is rejected; the supplemental assessment merely changes the timing of valuation and collection without altering tax rates or creating new tax obligations. Taxes on the supplemental roll become a lien upon the change in ownership or completion of construction and accrue at that time, with subsequent assessments being administrative steps for enforcement rather than new obligations.

The chapter aligns with California Constitution, article XIII A, which mandates valuing property at full cash value based on new ownership or construction. Modifying the lien date is deemed constitutional, as assessed properties affected by chapter 3.5 are locally rather than state-assessed. Section 75.18 introduces a permissible 2 percent inflation factor for properties reassessed between March 1 and June 30, to be applied in the following fiscal year, adhering to constitutional limits on year-to-year valuation increases. Additionally, appeals concern section 75.12’s compliance with the constitutional requirement for uniform assessment across all taxable properties, reinforcing the principle of uniformity in property taxation.

Section 75.12 delays the supplemental assessment of newly constructed properties held for sale until the property changes ownership or is rented, leased, or otherwise occupied by the owner. Plaintiffs argue that this creates an unauthorized partial temporary exemption from supplemental taxation, violating Article XIII, section 1 of the California Constitution, which mandates uniform taxation. The trial court agreed, stating that the section imposes a lower effective tax rate on properties not available for use, which conflicts with the constitutional requirement for uniformity.

However, under section 75.12, new construction held for sale is not added to the supplemental roll until ownership changes or occupancy occurs. The stipulation confirms that the regular local assessment roll remains unaffected, meaning all new construction is assessed as of the regular March 1 lien date. Without this provision, builders face immediate reassessment upon completion and again at the time of ownership transfer. With the provision, builders avoid supplemental assessments if properties remain unsold before the following March 1.

The provision does not exempt unsold homes from assessment; instead, it provides a temporary delay in supplemental tax levies. For instance, a house completed on March 30, 1984, sold on September 1, 1984, would be assessed in its partially completed state as of the March 1 lien date, and upon sale, the supplemental assessment would reflect the difference in value. This allows for taxation at full cash value during the current fiscal year, rather than delaying any increase in valuation until the next fiscal year.

The effect of section 75.12 shifts the tax burden from builders to home buyers, as builders are relieved from immediate supplemental assessments due to timing. The California Constitution allows the Legislature to make distinctions in assessment for legitimate state interests. The court's reliance on previous cases that found exemptions was misplaced, as properties held in inventory are not exempt but simply have their supplemental tax assessments deferred until sale, with no different tax rate applied compared to other residential properties. Concerns regarding indefinite delays resulting in tax escapes are unfounded.

Section 75.12, as amended in 1984, allows for the reassessment of unsold properties on the assessment roll for the March 1 following their completion, thereby imposing taxes as of the next lien date. In a cross-appeal, the State Board of Equalization disputes a claim by plaintiffs that this section violates equal protection clauses under both federal and state Constitutions. The trial court did not rule on this equal protection issue, having found section 75.12 invalid under the California Constitution's article XIII, section 1. However, due to the matter's public significance, it is subject to appellate review.

Plaintiffs argue that the section results in unequal taxation of similar properties based on owners' future intentions, a claim the court rejects. The court emphasizes that states have considerable leeway in establishing tax classifications unless they are arbitrary. Tax schemes favoring certain classes can be justified by administrative efficiency and legitimate state interests, such as addressing the housing crisis in California. The Legislature recognizes the urgent need for affordable housing and aims to promote efficient housing project completion. By excluding builders' unsold inventory from supplemental assessments, the legislation seeks to lower selling prices, benefiting buyers without violating equal protection provisions. The classifications established by section 75.12 are deemed rational and consistent with constitutional standards.

The State Board of Equalization contests the trial court's ruling that former section 75.5 constitutes an unauthorized tax exemption contrary to article XIII, section 1 of the California Constitution. Former section 75.5 defined 'Property' to exclude fixtures from supplemental assessment, meaning fixtures were not subject to this additional taxing during the statute’s effectiveness. Article XIII mandates uniform taxation of all non-exempt property. The definitions of real property in California's revenue and taxation laws dictate taxation, regardless of other definitions. While section 104 defines real property to include improvements, and section 105 includes fixtures as improvements, former section 75.5 creates a specific exclusion for supplemental assessment, leading to a conflict between the statutes. Under statutory construction principles, the specific statute (75.5) takes precedence.

The court determined that the exclusion of fixtures from supplemental assessment does not equate to a tax exemption, as these fixtures are still taxed at full cash value on the following assessment date, merely delaying the assessment time. The Legislature possesses broad authority to classify properties for taxation. Therefore, the court concluded that former section 75.5 does not violate article XIII, section 1, and reversed the trial court's judgment declaring it unconstitutional, while affirming the judgment in other respects. The case's rehearing petitions were denied in December 1985 and February 1986.

Plaintiffs/appellants are assessors from various California counties, including Marin, Alameda, Alpine, Butte, Calaveras, Colusa, Contra Costa, Del Norte, Fresno, Humboldt, Inyo, Kings, Lake, Lassen, Madera, Mariposa, Mendocino, Merced, Mono, Monterey, Plumas, Riverside, Sacramento, San Benito, San Bernardino, San Diego, San Joaquin, San Luis Obispo, San Mateo, Santa Clara, Santa Cruz, Shasta, Siskiyou, Solano, Sonoma, Sutter, Tehama, Trinity, Tulare, Tuolumne, and Ventura. The defendant/appellant is the State Board of Equalization. Interveners/appellants include Arcadia Development Company, Pyramid Homes, Inc., and Estate Homes of Northern California, Inc. The document notes that all statutory references pertain to the Revenue and Taxation Code unless stated otherwise.