CALIFORNIA SUPREME COURT OKs BROAD EXPANSION OF DOCUMENTARY TRANSFER TAX
Theodore F. Bayer
August 3, 2017
Taking an action that the state legislature specifically had refused to pursue, the California Supreme Court, in a 6-1 decision, recently ruled that counties and cities may impose documentary transfer tax (DTT) on any real estate-related transaction that constitutes a change of ownership under Proposition 13. So long as a documented transfer of “beneficial ownership” for consideration has occurred, DTT may be imposed – even in the absence of a recorded document. DTT must be paid on the “value of the consideration,” which in certain transactions is not readily apparent; and although the typical tax rate is only $1.10 per $1,000 of value, certain counties and cities are free to enact unlimited increases in that rate. Throw in the aggressive penalties for late, or under-, payment of DTT that some jurisdictions already charge, and the decision’s potential fiscal impact on property owners becomes significant.
The decision, 926 North Ardmore Avenue LLC v County of Los Angeles, involved a change in the majority ownership of a limited liability company which, in turn, owned real estate in Los Angeles. The Court’s focus was not on the language of the local ordinance but whether a reassessable change of ownership had occurred. Although the DTT ordinance adopted by the City of Los Angeles does not reference a change in majority ownership (a “change in control,” in property tax parlance) as a triggering event, the Supreme Court held that imposition of DTT was proper if the change in entity control constitutes a reassessable change in ownership under Prop. 13 and is reflected in a written instrument evidencing a transfer of the entity interest for consideration. The absence of a transfer of title to, or an interest in, real property and the fact that no documents had been recorded were deemed irrelevant: since a documented change of ownership for consideration had occurred, DTT may be imposed.
Since only an interest in an ownership entity, not an interest in real estate, was transferred, monies that changed hands were paid based upon the value of that interest. The Court, however, failed to address the “value of the consideration” from which the DTT should be calculated and did not specifically identify the date that the triggering event had occurred. Both are critical factors in determining the resulting tax and any associated penalties and interest. While the California statute (Rev. & Tax. Code Sections 11901 – 119034) authorizes a relatively nominal DTT rate (.11%), charter counties – currently fourteen (14), including LA, San Francisco, Santa Clara, San Mateo, Alameda, Orange and Sacramento - and charter cities (there are now 121, including Los Angeles, San Jose, Oakland and Palo Alto) are free to increase that rate. Many have done just that: San Francisco at 3% and Oakland and Berkeley at 1.5% lead the way, but others are sure to follow. The same is true for penalties; while the Rev. & Tax. Code does not provide for penalties or interest, certain charter counties and cities have imposed interest and robust penalties of up to 35% for late, or under-, payment. Other charter citites and counties are likely to follow their lead.
During the 2013-2014 legislative session, a bill (AB 561) to amend the Rev. & Tax. Code to authorize imposition of DTT on a change in control of an entity that owns real estate – the exact situation addressed in 926 North Ardmore -- died in committee. The Supreme Court now has effected that sweeping change and, in so doing, has declared that any documented transfer for consideration involving real estate which constitutes a reassessable change of ownership under Prop. 13 is subject to DTT. Unlike property tax (which is determined and imposed by the local Assessor and Tax Collector), DTT is an excise tax; and the burden is on the taxpayer to timely calculate, report and pay the tax or face imposition of applicable penalties and interest. Because the Court failed to provide any guidance with regard to identifying the “value of consideration” on which the DTT in entity interest, or other non-deed transaction, transfers is imposed, that calculation remains uncertain until clarified by the legislature or in local DTT ordinances. Those counties/cities which have adopted robust penalties and interest impose the majority of such charges immediately upon non-, or under-, payment of DTT; taxpayers therefore will be challenged to identify the appropriate value on which to calculate and to timely pay DTT in order to avoid associated penalties and interest.
The 926 North Ardmore decision has brought attention to a local tax that, until now, has been pursued aggressively as a meaningful revenue source by only a handful of charter cities/counties. Given the broad scope of the Supreme Court’s decision, the membership in that club is likely to increase significantly in the coming months.
© Starr Finley LLP 2017
Theodore F. Bayer, Of Counsel
About the Author
Mr. Bayer is a San Francisco-based transactional real estate attorney with extensive experience in California property tax and documentary transfer tax matters. He is Of Counsel to the transactional real estate and business law firm Starr Finley LLP. Email is [email protected]; direct line is (415) 743-2847; cell number is (415) 519-5586