In a unanimous decision issued on August 12, 2013, the California Supreme Court held that the California State Board of Equalization (the BOE) may not assess the value of intangible Emission Reduction Credits (ERCs) when valuing taxable power plant property. Elk Hills Power, LLC v. Board of Equalization (Aug. 12, 2013, S194121) __ Cal.4th __ (Elk Hills). Though it involved just one type of intangible asset, Elk Hills has far broader implications. The California Supreme Court’s decision makes clear that property taxation of virtually all intangible assets is prohibited under California law.
The taxpayer, Elk Hills Power, LLC, purchased five ERCs for approximately $11 million to construct and operate an electric power plant in Kern County, California. ERCs are part of a local emission offset system whereby existing pollution sources that voluntarily reduce their emissions below certain levels may receive ERCs. ERCs are marketable once approved by local regulatory authorities and can be traded or sold for profit.
The BOE used the replacement cost approach and the income capitalization approach to derive a unit value of the taxpayer’s power plant for property tax purposes. In applying the replacement cost approach, the BOE added the estimated cost of replacing the ERCs in calculating the total replacement cost for the taxable power plant. Under the income capitalization approach, which estimates the present value of the taxable property’s expected future income stream, the BOE did not deduct the value of the ERCs from the overall value of the taxable power plant.
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