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■ Air China Ltd. v. San Mateo County , No. A120971

Air China Limited appeals from a summary judgment entered in favor of San Mateo County finding that the County’s assessment and collection of taxes on Air China’s leasehold possessory interests and landing rights at the San Francisco International Airport (Airport) pursuant to California Revenue and Taxation Code[1] sections 107 and 107.9 was proper.  Air China contends that a tax treaty between the United States and the People’s Republic of China (PRC) prohibits the County from imposing taxes on its operations at the Airport, and that the taxes are contrary to the United States Internal Revenue Code and to the Chicago Convention on International Civil Aviation, December 7, 1944, 61 Stat. 1180, 1189 (the Chicago Convention).  We affirm.

I.  FACTUAL BACKGROUND

            The parties stipulated to the following facts:  Air China is a corporation organized and existing under the laws of the PRC and is engaged exclusively in international air transportation serving various cities throughout the world including San Francisco.  Air China operates aircraft out of the Airport and leases space there that it uses exclusively for its air transportation operations.

            The United States and the PRC are parties to a tax treaty—“Agreement between the Government of the United States of America and the People’s Republic of China with Respect to Mutual Exemptions from Taxation of Transportation Income of Shipping and Air Transport Enterprises” (Tax Treaty).  The Tax Treaty exempts both the United States and the PRC from taxation by the other party for income and profits generated from the operation of aircraft in international air transportation.

            Air China leases space from the Airport and makes payments for the use of the premises.  Air China also pays landing fees for the right to land at the Airport.  Since 2000, the County has imposed property taxes including possessory interest taxes on Air China’s leasehold improvements, and landing rights at the Airport.  Air China has paid these taxes under protest.

            On October 21, 2002, the California State Board of Equalization (Board) issued a letter opinion in response to an inquiry by Air China concerning the Tax Treaty’s tax exemption.  The Board concluded that the County’s imposition of any property tax on Air China’s aircraft or other property including possessory interests was prohibited by the Tax Treaty. 

            In May 2006, Air China requested a refund of taxes under section 5096.  The County did not issue a formal response to the request.  In February 2007, Air China commenced this action seeking a refund and a declaration that the possessory interest taxes imposed are prohibited by the Tax Treaty.  The parties subsequently filed motions for summary judgment based on the above stipulated facts.  The court granted the County’s motion, finding that the Tax Treaty did not prohibit imposition of taxes on Air China’s possessory and leasehold interests and denied Air China’s motion.  This appeal followed.

II.  DISCUSSION

A.        Standard of Review

            This appeal presents a question of law on stipulated facts.  We therefore review the trial court’s judgment de novo.  (MacIsaac v. Waste Management Collection & Recycling, Inc. (2005) 134 Cal.App.4th 1076, 1081-1082.)

■ Held:

In a dispute involving the collection and assessment of taxes, trial court's grant of summary judgment for defendant is affirmed where: 1) defendant has the right to tax plaintiff's possessory interests and landing rights at the San Francisco International Airport; 2) the tax treaty between the United States and the People's Republic of China does not prohibit defendant from taxing plaintiff's possessory interests at the airport, as nothing in the language of the treaty applies to taxation of possessory interests or exempts air transportation enterprises from property taxation; and 3) the tax does not violate the IRS code as it is a property tax not a tax on gross income.
Air China v. San Mateo Cty.-A120971- 5/21/09 CA1/4
Air China v. San Mateo Cty.-A120971- 5/21/09 CA1/4-PDF

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