Cable Industry Battling Changes in Property Tax Assessments : Taxes: The issue has been increasingly controversial statewide since the mid-1980s.

To hear the cable television companies tell it, Orange County Tax Assessor Bradley Jacobs is picking on cable TV.

The cable companies claim that Jacobs’ method of determining the value of property for tax purposes is using the industry as a test case for a new assessment procedure that will eventually hit all businesses.

But Jacobs, who won’t comment publicly on the cable industry’s charges, is no renegade. Following the lead of tax assessors in other California counties, he has reassessed cable television properties in a way that he claims reflects their true market value.

The powerful cable lobby is fighting back, and the fierce battle is now focused on Orange County. There a group of 10 cable operators allege in a lawsuit that Jacobs has violated their constitutional rights, with huge tax increases without due process. And they charge in shrill newspaper advertisements that the sharp increases in property tax assessments--in some cases more than tripling them--will raise consumer bills by as much as $2 a month.

“He doesn’t like cable television, doesn’t like the product,� said John F. Gibbs, vice president of Continental Cablevision’s Southern California operations and the lead spokesman for the group. “It’s either a vendetta or the beginning of a crusade.�

The highly personal nature of the attack on Jacobs, however, obscures the fact that property tax assessments on cable television systems have become an increasingly controversial issue throughout California since the mid-1980s.

In Yuba, Sutter, Stanislaus and San Diego counties, local tax assessors have been trying, with the support of officials at the State Board of Equalization, to increase the assessments of cable properties to what they say is market value. And a number of other counties, including Los Angeles, are poised to join the movement.

The Orange County fracas has brought into focus a statewide dispute that involves tens of millions of potential tax dollars, millions of cable subscribers and will likely be resolved--years from now--by the state courts.

The cable industry, with a San Francisco-based legal team shuttling up and down the state, has fought the new assessments every step of the way and even managed two years ago to push a bill through the Legislature that supports its position.

It’s not hard to see why the cable industry has taken the offensive on the property tax issue. In Orange County, the 10 cable television operators say their collective tax bills have skyrocketed from $2.4 million in 1988 to $7.7 million in 1989. They also have been hit with a one-time charge of $8.5 million for re-assessments for 1985 through 1988. Appeals hearings on the controversial assessments began this week in Santa Ana.

In Yuba and Sutter counties, Continental Cablevision and the two tax assessors have been fighting for years over whether the value of the bi-county cable system property is closer to $13 million or $37 million. In Stanislaus County, the assessment on the Post-Newsweek cable system was increased from $5.5 million to $16.1 million for 1982, and the two parties have been arguing in court on the issue since 1985.

Such large increases in property taxes, the cable companies say, will be passed on to consumers. In Orange County, rate hikes of $1 to $2 a month for basic cable are in the offing, and some companies have already added a surcharge to customer bills.

The largest cable operators in Orange County are Paragon Cable and Dimension Cable, which serves most of the county’s southern portion. Dimension is a subsidiary of Times Mirror Co., which also owns the Los Angeles Times.

Lying behind the sharp assessment increases is a fundamental conflict over the way the systems should be valued.

Under the state Constitution, property taxes may be levied only on real property, including real estate and any permanent improvements made on the real estate, and personal property, which includes tangible assets--office equipment, for example--that are not considered real property.

In addition, the right to use public lands or rights-of-way for private gain, known as possessory interest, is also valued as property and subject to taxation. But the Constitution specifically excludes “intangibles,� such as goodwill--which includes the inherent value of a customer base--and enterprise activity, from property tax assessments.

Traditionally, tax assessors simply computed the replacement value of the cables, converters, satellite dishes and other hardware that go into a cable television system and then added to that a possessory interest valuation that was based on the franchise fee that the company paid to the county or city. That’s the approach cable companies continue to support.

But with the dramatic increase in the market value of cable television systems during the 1980s--as reflected in the sale price of the numerous systems that were bought and sold during that time--it became clear that the traditional assessment method yielded values that were only a fraction of the worth of cable systems on the open market.

David Brown, assistant assessor for Yuba County, recalls that when the local system was sold to Continental Cablevision by McClatchy Newspapers, the system was valued on the tax rolls at $7 million. But the acquisition price was $35 million.

“We were aware of what was paid, and we wanted to know what the difference was between $7 million and $35 million,� Brown said. “They said the difference was in the intangibles. But we said they had a very valuable leasehold, a possessory interest, and when you combine that with the other assets, that’s the unit that has to be appraised.�

Does the high value of cable television systems reflect the high value of the taxable property or the high value of tax-exempt intangibles? Not surprisingly, many tax assessors--who assert that the cable companies’ de facto monopoly makes the possessory interest extremely valuable--say it’s the former. The cable companies, who strenuously deny they hold monopolies, insist that it is the latter.

The state Board of Equalization establishes guidelines on how county tax assessors should go about their work. Generally, assessors can judge value by three methods: replacement cost of the property; income produced by the property, or the sales price fetched on the open market of a comparable property.

In the case of cable TV franchises, however, the Board of Equalization in 1987 withdrew guidelines for assessments of cable companies based on the replacement cost approach. The Board’s staff advocated a new method that considered income and comparable sales, which would produce sharply higher assessments.

The staff recommendations are contained in a draft of a new assessors handbook that was promulgated in late 1988 but has not yet been formally approved by the state board. But that hasn’t stopped the assessors in Orange, Yuba, Sutter, Stanislaus and San Diego counties from adopting the new guidelines.

“The assessors are gradually buying into the concepts in the draft,� said Verne Walton, chief of the assessment standards division at the Board of Equalization. He hopes the draft will go before the full board for approval this fall, but acknowledges that it faces strong opposition from the cable industry.

“The document has been distributed for their comments, and we haven’t heard anything from them,� he said. “But they’re going to object to most everything we’ve said.�

Gibbs portrays the new guidelines as the work of a few Board of Equalization staffers, who then went out “looking for some assessors to follow their lead� in an effort to establish the new principles. He maintains that the assessments in Stanislaus, Yuba, Sutter and now Orange County are “dramatically the exception� and that the move towards the new assessment approach “is not picking up a head of steam very fast.�

Still, the cable industry was concerned enough about the trend to push legislation, sponsored by Sen. Frank Hill (R-Whittier) and passed in 1988, that endorsed the use of the cost approach in assessing cable television properties. Gil Ferguson (R-Newport Beach) earlier this month introduced another bill to limit assessor’s latitude in taxing cable television.

And it’s clear that assessors in many jurisdictions are at least considering a new approach to cable valuations. “We’ve been working on an appraisal method that we feel will reflect the market value,� said Marvin Lane, principal assessor for Los Angeles County. “We’re still studying the situation, trying to find a method that will stand up in court.�

“It’s in a state of flux--a very difficult situation,� Lane added. And he said the cable industry was “the most aggressive industry I’ve ever seen in fighting this stuff.�

Gibbs, however, expressed disbelief that the Los Angeles County assessor would adopt anything resembling what Jacobs has done in Orange County. In fact, he says, Jacobs has gone far beyond what the Stanislaus, Yuba, and Sutter County assessors have done.

“The Orange County method yields assessments 30% higher than the Sutter County method,� he said. While the Northern California counties have reached their figures by placing a high value on the possessory interest, Orange County has assigned the high value to the real property.

Jacobs has declined to comment on the controversy, citing the pending litigation. Ron Cooper, deputy assessor for Orange County, said the method for allocating value to different components of the system was “insignificant.� The cable systems are valued as a unit first, based on income and comparable sales, and then the dollars are allocated to different components.

The Orange County method places virtually all the value of a cable system in the property, rather than in any intangibles, and yields a result which Cooper said is “identical to other counties� that have adopted the new method.

Walton of the Board of Equalization agreed that the allocation of costs was far less important than that determination of the total value for the system. He added that the Orange County assessments appeared to be quite similar to those in the other counties.

Jim Janette, chief of evaluation for the San Diego County assessor’s office, said the county is doing “exactly what Orange County has done,� although the new assessments have been held in abeyance until the legal situation can be clarified. San Diego helped establish the principle of taxing cable company franchise rights as a possessory interest in a landmark case involving Cox Cable.

The tortuous process by which tax assessments are appealed assures that a clear resolution of the issue is some years away. Companies that object to their assessments first appeal to an assessment appeals board, which is appointed by the county Board of Supervisors.

If either the assessor or the taxpayer doesn’t like the appeals board decision, they can take the case to Superior Court. The court, in turn, will often remand the case back to the appeals board with instructions. The Superior Court decision can also be appealed to the State Appellate Court.

Although a series of appellate court decisions--some involving non-cable businesses--have clarified some of the principles at issue in the cable TV cases, the legal situation remains murky. In the most important ruling so far, a California appellate court issued a decision in September on the Stanislaus County case that both sides immediately claimed as a victory. In that decision, the court ruled that although intangible property could not be taxed, assessors could consider how the intangibles might enhance the value of taxable property. Thus, though the company’s franchise to operate a cable system might be an intangible, the assessor could consider how the value of its possessory interest in rights-of-way along the streets might be enhanced by the right to do business.

At the same time, the court noted that intangible property could only be taxed via an income tax, not a property tax. And in a second case in the same county, a Superior Court judge cited the appeals court ruling in rejecting the assessors’ high valuation of the property. So the cable companies have been able to claim a legal victory as well.

In Orange County, the assessments against the 10 local cable firms have just begun their long journey through the appeals process: The first assessment appeals board hearings were held last week.

The cable companies have indicated their intention to challenge the assessments on a broad range of points. They object not only to the basic principle of using an income and comparable-sales approach rather than a cost approach, but also to the allocation of value among real property, personal property and possessory interest.

In a lawsuit, they have also challenged the assessments as discriminatory and a violation of their due process rights. Other media properties, such as newspapers and broadcast television stations, are not assessed at anything approaching their market value as operating companies, the cable firms point out.

Ultimately, the issue seems likely to be resolved by the appellate court or the state Supreme Court, if the legislature does not intervene with a new law before then. And while many assessors acknowledge that the legal outcome is far from certain, one thing is clear: The eventual result will have nothing to do with whether Brad Jacobs likes television.