Last year, in Elk Hills Power, LLC v. Board of Equalization, 123 Cal. Rptr. 3d 906 (2011), the California Court of Appeal held that a California power plant was correctly assessed and valued for property tax purposes by assuming the presence of intangible assets or rights (emission reduction credits or “ERCs”) necessary to put the taxable property to beneficial or productive use. Elk Hills petitioned for review to the Supreme Court of California, arguing that the Court of Appeal’s opinion violated the express constitutional exemption, under Article XIII, §2 of the California Constitution, and statutory prohibition, under California Revenue and Taxation Code sections 110 and 212, against ad valorem taxation of intangible assets and rights when tangible real and personal property is assessed. The Supreme Court granted the petition for review and will determine whether the State Board of Equalization (“BOE”) properly assessed Elk Hills’ ERCs. The outcome in this case may have a significant impact on the numerous businesses that use intangible assets that are “necessary” to the conduct of their businesses (e.g., trademarks, trade names, franchises, licenses, customer relationships, patents, and copyrights).
Initially, the trial court affirmed the BOE?s finding that the ERCs were “necessary” for construction of the Elk Hills? power plant. As a result, they were an attribute of taxable real property under Revenue and Taxation Code section 110(f). The Court of Appeal affirmed, but on the grounds that although ERCs are an intangible asset or right (and thus not subject to property tax), under Revenue and Taxation Code section 110(e), the ERCs were “necessary” to put the power plant to “beneficial or productive use,” so the full value of the intangible assets could be added to the value of the taxable property. As Elk Hills noted in its petition for review, the Court of Appeal?s decision arguably overturns several California Supreme Court decisions which hold that intangible assets or rights are not taxable, and also is contrary to certain BOE appraisal guidelines
This Supreme Court case could have significant implications on the taxation of intangible property within the State of California. We will continue to monitor any developments in this case and report on them when appropriate.