For the first time in 50 years, the California Supreme Court is revisiting the issue of the proper application of the property tax to intangible assets. In Elk Hills Power, LLC v. California State Board of Equalization, Case No. S194121, the court will address whether the California State Board of Equalization (the Board) may assess Elk Hills’ intangible Emission Reduction Credits (ERCs). In Elk Hills, the Board treated the ERCs as “necessary” to put a power plant to “beneficial or productive use” and thus taxable for property tax purposes. Because many businesses use intangible assets that are “necessary” to the conduct of their businesses (e.g., trademarks, trade names, franchises, licenses, customer relationships, patents, and copyrights), the case has attracted attention across a broad spectrum of the California business community.
The trial court in this case initially agreed with the Board’s finding that the ERCs were “necessary” to construct Elk Hills’ power plant, and therefore were an attribute of taxable real property under Revenue and Taxation Code section 110(f). The Court of Appeal affirmed the lower court but on different grounds. Elk Hills Power, LLC v. Board of Equalization, 195 Cal. App. 4th 289 (2011). First, the Court of Appeal held that ERCs are an intangible asset or right, and thus not subject to property tax. However, under the language of Revenue and Taxation Code section 110(e), the court reasoned that the full value of those intangible ERCs may be added to the value of the taxable property—Elk Hills’ power plant—because they were “necessary” to put the power plant to “beneficial or productive use.” Id. at 293.
The Court of Appeal’s decision potentially overturns several California Supreme Court decisions affirming the nontaxability of intangible assets or rights. It further calls into question several aspects of the Board’s appraisal guidance.
Amicus briefs have been filed by, among others, the Council On State Taxation (COST), the Institute for Professionals in Taxation (IPT), the Broadband Tax Institute, the California Taxpayers Association (CalTax), joined by the California Manufacturers & Technology Association and the Silicon Valley Leadership Group, and the California Cable and Telecommunications Association. Taxpayers should monitor this California Supreme Court case because it could have significant implications with respect to the taxation of intangible property in California.