BILL ANALYSIS Ó
AB 748
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Date of Hearing: April 27, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
AB 748
(Lackey) - As Amended April 6, 2015
Majority vote. Fiscal committee.
SUBJECT: Taxation: exemptions: public schools
SUMMARY: Extends the application of the "public school" property
tax exemption to property acquired by a qualified organization,
as defined, after the lien date, as specified.
EXISTING LAW:
1)Provides that all property is taxable unless explicitly
exempted by the California Constitution or federal law and
limits the maximum amount of any ad valorem tax on real
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property at 1% of full cash value.
2)Provides an exemption from taxation for property that is
irrevocably dedicated to religious, hospital, scientific, or
charitable purposes, if the property is used for the actual
operation of the exempt activity and is owned by a nonprofit
entity qualified as an exempt organization by the Internal
Revenue Service, the Franchise Tax Board, or both (the
so-called 'welfare exemption') [Article XIII, Section 4, of
the California Constitution; Revenue and Taxation Code (RT&C)
Section 214]. The entity that owns the property is prohibited
from having any earnings that contribute to the benefit of any
private shareholder or individual. This welfare exemption has
been expanded over the years to add certain specific types of
property that do not otherwise qualify under the general
exemption.
3)Provides, with respect to newly acquired property, that a
nonprofit organization has 90 days after the date of change in
ownership to qualify for an exemption. (R&TC Section 271.)
4)Exempts property used exclusively for public school purposes
from property tax. [California Constitution, Article XIII,
Section 3(d); R&TC Section 202.]
5)Requires any person claiming specified property tax
exemptions, including the public school exemption, to timely
file an annual affidavit with the assessor. (R&TC Section
254.)
6)Allows the assessor to provide a partial exemption if the
claim is filed late. (R&TC Section 270.)
7)Provides that, in the case of a supplemental assessment, an
assessee may qualify for certain property tax exemptions if
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the assessee files an exemption application within a specified
time. (R&TC Section 75.21.)
8)Does not expressly allow a recovery of property taxes,
penalties or interest under the "public school" exemption in
the following cases:
a) An acquisition of property by an organization after the
lien date but before the commencement of the fiscal year
[R&TC Section 271(a)(1)];
b) An acquisition of property by a newly created
organization after the lien date but before the
commencement of the fiscal year [R&TC Section 271(a)(2)];
c) An acquisition of property by a qualified organization
after the beginning of the fiscal year [R&TC Section
271(a)(3)]; and,
d) A construction or purchase of property that is eligible,
or becomes eligible for the exemption within 180 days of
new construction completion or initial acquisition, as the
case may be, by a qualified organization [R&TC Section
75.21(c)].
FISCAL EFFECT: According to the BOE staff, the number of
schools that claim the public school exemption with no other
available exemption and that could benefit from the code
sections amended in this bill is unknown. Given that the
exclusion of public schools from these code sections previously
has been undetected, it is estimated that the revenue impact
will be negligible.
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COMMENTS:
1)Author's Statement . The author has provided the following
statement in support of this bill:
"Section 271 inadvertently failed to include public schools in
the list of organizations eligible for property tax exemption
in the year the property was acquired. While this does not
cause a problem for most public schools, it does for charter
schools. Government-owned public schools, charter schools,
nonprofit-run schools and church-run schools operate to
educate children. All of these schools can qualify for
various property tax exemptions (i.e., government-owned
property exemption, public schools exemption, welfare
exemption and the religious exemption). Different laws apply
that are specific to each exemption.
"As a result, charter schools that are public schools are not
always treated equally as other schools or exempt entities in
some areas of the tax code. Section 271 is one such area
because the public schools exemption is not expressly listed.
Thus, when charter schools acquire property and put it to
qualified use, they must wait until the following lien date
(January 1) to obtain a property tax exemption.
"AB 748 will provide charter schools the same treatment that
other public schools and exempt organizations receive for new
property acquisitions and newly-created entities."
2)Arguments in Support . The sponsor of this bill states that
existing law "inadvertently failed to include public schools
in the list of organizations eligible for a property tax
exemption in the year the property was acquired, even if it is
immediately put to qualified use." The sponsor asserts that
"AB 748 promotes consistency and corrects an inadvertent
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omission in the code."
The proponents of this bill note that it is necessary to correct
an oversight "in adding public schools to the list of entities
entitled to cancel or refund their taxes for property that
they purchased that is otherwise exempt." The proponents
argue that this bill "will provide charter schools the same
treatment that other public schools and exempt organizations
receive for new property acquisitions and newly-created
entities." Finally, the proponents state that "[b]ecause
public schools operate on tight budgets and benefit the
community as a whole, any measure that assists the public
schools in improving their fiscal position is a net benefit to
the state."
3)Property Tax Exemptions: Background . The California
Constitution provides that all property is taxable unless
explicitly exempted by the Constitution or federal law. The
Constitution limits the maximum amount of any ad valorem tax
on real property at 1% of full cash value, plus any locally
authorized bonded indebtedness. Assessors reappraise property
whenever it is purchased, newly constructed, or when ownership
changes.
The California Constitution allows the Legislature to establish
a property tax exemption for property exclusively used for
charitable purposes and owned by nonprofit entities organized
and operated for charitable purposes. [California
Constitution, Article XIII, Section (4)(b).] The Constitution
also specifies that the exemption, if authorized, must apply
to buildings under construction, the land on which the
buildings are situated, and equipment in the buildings if
their intended use is exclusively for exempt purposes.
(California Constitution, Article XIII, Section 5.) In 1954,
the Legislature enacted the exemption, commonly known as the
"welfare exemption," providing, as required by the
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Constitution, that qualified property includes: (a)
facilities in the course of construction, and (b) the land on
which the facilities are located.
The California Constitution also exempts from property tax
government-owned property; property used exclusively for
educational purposes by a nonprofit institution of higher
education; property used exclusively for religious workship,
cemeteries, and growing crops; property owned by veterans;
property used for libraries and museums; and property used by
public schools, among others.
4)"Public School" Exemption . The California Constitution
expressly exempts property used exclusively for public
schools, community colleges, state colleges, and state
universities from property tax. (Article XIII, Section 3(d).)
The property is exempt from taxation on the basis of its
exclusive use for public school purposes. This section has
been interpreted by the courts to be concerned primarily with
defining the circumstances under which property not owned by a
public school or university is entitled to a tax exemption.
The section's purpose is to encourage private property owners
to make property available for public school use. [Connolly
v. Orange County (1992) 1 Cal.4th 1105.] Under the rule of
strict, but reasonable, construction, the phrase "exclusively
used for public schools" refers not only to primary but to
certain incidental uses as well; however, such incidental uses
must be directly connected with, essential to, and in
furtherance of the primary use and not merely
revenue-generating devices. [Honeywell Information Systems,
Inc. v. Sonoma County (1974) 44 Cal.App.3d 23.] A charter
school, including a charter school operating as or by a
nonprofit public benefit corporation, is exempt from property
tax as a "public school."
5)Filing "Public School" Exemption Claims: a Regular Assessment
Roll . Qualification for the public school exemption requires
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an annual claim form to be filed with the local county
assessor where the property is located. To receive the full
100% exemption for property owned or leased on the January 1
lien date, the claim must be filed by February 15. If the
public school does not own the property, the property owner
may file a claim under the Lessor's Exemption. In general,
the Lessor's Exemption is available on certain types of leased
property when the exemption of property taxes benefits the
lessee institution in the form of rental reduction or a
refund. The Lessor's Exemption is available to property that
is leased, as of the lien date, January 1, for public school
purposes (R&TC Section 202.2). But if the property owner
neglects to claim the exemption, the public school may file
the public school exemption claim.
If the claim is filed late, the assessor may provide a partial
exemption. Existing law authorizes a cancellation or refund
of 90% or 85%, whichever is applicable, of any tax, penalty,
or interest with respect to property that qualifies for a
"public school" exemption, among others, but for which a
timely exemption application was not filed, if the application
is filed within a certain specified time period.
Notwithstanding this limitation, any tax or penalty or
interest in excess of $250 in total amount will be canceled or
refunded, provided an appropriate claim for exemption has been
filed.
6)Property Acquired After the Lien Date by a Qualified
Organization . When an organization that qualifies for a
certain property tax exemption acquires property late in the
calendar year, it is allowed additional time to file exemption
claims for the property. Because claims must be filed by the
lien date (January 1), an organization may be disadvantaged if
it acquires real property late in the calendar year. The
Legislature removed the disadvantage by allowing these
organizations additional time to file an exemption for all
qualified property acquisitions, regardless of the date
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acquired. Thus, existing law allows property taxes,
penalties, or interest imposed for delinquent filings of
applications to be cancelled or refunded in the case of an
organization that is eligible for a college, cemetery, church,
religious, exhibition, tribal housing, veterans' organization
or welfare exemption. Specifically, if such an organization
either acquires new property or is organized after the lien
date, the property tax, penalties, or interest will be
cancelled or refunded if the organization files an exemption
application within 90 days from the first day of the next
month following the date on which the property was acquired,
or by February 15 of the following calendar year, whichever
occurs first. A pro-rata exemption is allowed for eligible
property acquired by a qualified organization after the
beginning of the fiscal year, whether or not the organization
was in existence on the lien date. Property acquired by a
public school, including a charter school, after the lien date
is not currently included in these provisions.
7)Supplemental Assessment Roll: Filing Exemption Claims . In
1983, the Legislature created what is known as "supplemental
assessment." Changes in ownership or new construction may
result in supplemental tax bills issued in addition to the
annual property tax bill. The increase (or decrease) in
assessed value resulting from the reappraisal is reflected in
a prorated assessment (a supplemental bill) that covers the
period from the first day of the month following the
supplemental event to the end of the fiscal year. A fiscal
year runs from July 1 through June 30. Supplemental
assessments apply to real property (land, improvements, and
fixtures and taxable possessory interests), but do not apply
to personal property or any property not subject to Article
XIII A (Proposition 13).
Under current law, property may receive an exemption from the
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supplemental assessment if a claim for the exemption is filed
by an eligible assessee. In order to obtain a 100% exemption,
the claim must be filed within 30 days of the notice of
supplemental assessment. For a valid claim filed on or before
the delinquency date for the first installment of tax on the
supplemental tax bill, 90% of any tax, penalty or interest (or
any amount exceeding $250, whichever is greater) attributable
to the supplemental assessment amount will be cancelled or
refunded. For any valid claim filed later, only 85% of the
tax, penalty or interest (or any amount exceeding $250,
whichever is greater) will be cancelled or refunded. These
refund/cancellation provisions apply to property eligible for
the college, cemetery, church, religious, exhibition,
veterans' organization, free public libraries, free museums,
or welfare exemption. In the case of all other exemptions,
including the public schools exemption, the $250 cap does not
apply when the claim for exemption is filed on or before the
date for the first installment of taxes on the supplemental
tax bill. Thus, it appears that existing law already
authorizes a cancellation/refund of supplemental assessment
amount for the property eligible for the public school
exemption in the case of late filing. However, in these
circumstances, existing law does not limit the maximum amount
payable by the assessee to $250.
An additional exemption claim is not required to be filed by
the assessee in the instance where a supplemental assessment
results from a change in ownership of property, if the
purchaser of the property owns and/or uses property exempted
under the college, cemetery, church, religious, exhibition,
veterans' organization, free public libraries, free museums,
or welfare exemption. In contrast, property eligible for the
public school exemption is not granted this expedited
treatment.
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8)What is the Problem ? Various property tax exemptions may
apply to property owned or used by schools depending upon the
type of school and facts of each case. The possible
exemptions include the local government-owned property
exemption, the state-owned property exemption, the welfare
exemption, and the public schools or the religious exemption.
Generally, applicable law is specific to each exemption.
According to the author, existing law has failed to provide
relief for property used exclusively for public schools in
certain circumstances. Thus, when a charter school acquires
property and puts it to qualified use after the lien date, it
must wait until the following January 1 to obtain a property
tax exemption. There is no mechanism in place for the charter
school to receive a refund for the property taxes already paid
under these circumstances. In contrast, the author notes a
public school owned and operated by a school district will
qualify for property tax exemption under a government-owned
exemption.
9)Proposed Solution: Confusing "Use-Based" Exemptions with
"Entity-Based" Exemptions . This bill is intended to provide
charter schools with the same tax treatment that other public
schools enjoy. However, it is unclear to Committee staff how
this bill would create parity between property owned by public
schools and property owned by charter schools. In the former
case, public schools qualify for property tax relief under the
government-owned exemption. In the latter case, property must
be used exclusively for public school purposes to qualify for
the "public school" exemption, irrespective of the ownership.
In an attempt to exempt property purchased by a charter school
after the lien date under the "public school" exemption, this
bill amends a section of the law that deals with property
acquisitions by an organization where it appears that both the
organization and the property must qualify for the exemption.
Thus, first this bill seems to expand the list of
organizations eligible for the cancellation or refund of
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property tax, penalty or interest imposed on property acquired
by a listed organization after the lien date; it does so by
providing that property must be owned by an organization that
qualifies for the public school exemption. The plain language
of the amendment reveals that this qualification requirement
is redundant at best and may be unconstitutional in the
worse-case scenario. If one assumes that the "ownership by an
organization that qualifies for the public school exemption"
means an actual possession and use of the property by a
charter school for public school purposes, then the
requirement is duplicative of existing law. If, on the other
hand, this phrase is interpreted as holding title in fee
simple, as opposed to all other rights to the property, then
the qualification provision would create a new additional
requirement that currently does not exist in law. In essence,
this bill would limit the application of the "public school"
exemption only to property that is owned by charter or public
schools.
But, in contrast to other exemptions, the "public school"
exemption is not based on the ownership of the property
claimed to be eligible. Put differently, this bill is
absolutely irrelevant whether the property at issue is owned
by a non-profit, government or private entity; what matters is
whether the property is used exclusively by an organization
for public school purposes. Unlike the educational property
exemption or welfare exemption, which are concerned "with
defining the permissible uses to which a charitable
organization or educational institution may put its own
property", the public schools exemption "is concerned
primarily with defining the circumstances under which property
not owned by a public school or university is entitled to a
tax exemption." (Connolly, 1 Cal.4th 1105, 1129.) As pointed
out by the California Supreme Court, "Since other
governmentally owned property was... [already] exempt, the
inclusion in the 1879 Constitution of an express exemption of
'property used exclusively for public schools' necessarily had
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another purpose. That purpose was to create a new exemption,
one for property 'used for', but not "owned by," a public
school." (Id., p. 1123.) In explaining "why a sheer usage of
property without a concomitant ownership should entitle the
school district to a tax exemption, the Supreme Court pointed
out that the exemption of property used for public school
purposes is not for the benefit of the private owner who may
rent ? his property for said purpose, but for the advantage of
the school district which may be compelled to rent property
rather than to buy land and erect building thereon to be used
for the maintenance of its school." [Honeywell, 44 Cal. App.
3d 23, 30 (emphasis added).] Therefore, requiring an
organization, which owns eligible property, to qualify for a
public school exemption is simply illogical.
Second, this bill specifies that the property must be of a
kind that "would have been qualified for the public school
exemption if it had been owned by the organization on a lien
date," among other conditions. To reiterate, the public
schools exemption is a "use-based" exemption. In other words,
it is the use of the property that qualifies it for the
exemption, not the ownership, actual or presumed. Even if the
property had been owned by a qualified organization, but not
used exclusively for public school purposes, it would not have
qualified for the exemption<1>. In contrast, if the property
were used for eligible purposes, it would have qualified for
the exemption, regardless of the ownership. The California
Supreme Court, in analyzing a long-term leasehold interest in
property leased from a university by a faculty member to build
--------------------------
<1> "We agree that there is a distinction between the exemption
granted charitable institutions (see Cal. Const. Art. XIII,
Section 3 (d) and Section 4(b)) and the exemption which pertains
to public schools and free public libraries. Basically, the
welfare exception applies where property is used and owned by
certain specified organizations. The ownership requirement does
not apply to the public schools and free public libraries.
Accordingly, arguments based on the welfare exemption do not
apply." (Yttrup Homes v. County of Sacramento, 73 Cal.App.3d
279, 282, fn. 1.)
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or maintain a privately owned residence for his own use,
concluded that "it does not follow that simply because
a?private college may be entitled to a tax exemption for
portions of its property on which it has built?a faculty
housing, a faculty member is similarly entitled to a tax
exemption when he?uses a long-term leasehold interest in
property?for his or her own use." (Connolly, 1 Cal.4th 1105,
1129.) Again, it is the use of the property that is
determinative in deciding whether property is entitled to the
public schools exemption.
10)What is "Exclusive Use" ? Similarly to the welfare exception,
the language of the "public school" exemption requires that
property be used exclusively for public schools, community
colleges, state colleges, and state universities. In
determining the meaning of the phrase "used exclusively" for
purposes of the welfare exemption, the California Supreme
Court noted that such express limitation "making use the focal
point of consideration, contemplates actual use as
differentiated from an intention to use the property in a
designated manner." [Cedars of Lebanon Hospital v. County of
Los Angeles (1950) 35 Cal.2d 729, 742.] The Court held that
"considerations attesting to the exercise of the institution's
good faith" are "wholly immaterial under the welfare exemption
law, where the language plainly makes use of the property the
basis of the exemption." (Id., p. 743.) Similarly, based on
the plain language of the Constitution, it appears that an
actual use of the property by a charter school is required in
order for the property to qualify for the "public school"
exemption. However, the proposed language instead purports to
allow a public school exemption based on the presumptive use
of property by a charter school.
Therefore, it appears that this bill fails to achieve the
author's intended goal. The Committee may also wish to
consider whether this bill would further complicate an already
difficult area of the law.
REGISTERED SUPPORT / OPPOSITION:
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Support
California Assessors' Association
George Runner, Member of the State Board of Equalization
(Sponsor)
Guidance Charter School
Palmdale Aerospace Academy
Opposition
None on file
Analysis Prepared by:Oksana Jaffe / REV. & TAX. / (916) 319-2098
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