BILL ANALYSIS Ó
SB 2
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Date of Hearing: July 13, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
SB
2 (Anderson) - As Amended April 6, 2015
Majority vote. Tax Levy. Fiscal committee.
SENATE VOTE: 40-0
SUBJECT: Property taxation: exemptions: veterans'
organizations.
SUMMARY: Extends the application of the "veterans'
organization" property tax exemption to real property owned by
certain veterans' organizations and used for fraternal, lodge,
or social club purposes, as specified, excluding the bar area.
Specifically, this bill:
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1)Provides that property, which is owned by a veteran's
organization chartered by the United States (U.S.) Congress
and otherwise eligible for the veterans' organization
exemption, may not be denied the exemption on the basis that
the property is used for fraternal, lodge, or social club
purposes.
2)Requires that an otherwise eligible veterans' organization be
exempt from federal income tax as an organization described in
Internal Revenue Code (IRC) Section 501(c)(19).
3)Specifies that the veterans' organization exemption shall not
apply to any portion of the property that consists of a bar
where alcoholic beverages are served. The portion of the
property ineligible for the exemption is the area used
primarily to prepare and serve alcoholic beverages.
4)Codifies all of the following legislative findings and
declarations:
a) The exempt activities of a veterans' organization, as
specified, qualitatively differ from the exempt activities
of other nonprofit organizations that use property for
fraternal, lodge, or social club purposes in that the
exempt purpose of the veterans' organizations is to conduct
programs to perpetuate the memory of deceased veterans and
members of the Armed Forces and to comfort their survivors,
to conduct programs for religious, charitable, scientific,
literary, or educational purposes, to sponsor or
participate in activities of a patriotic nature, and to
provide social and recreational activities for their
members;
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b) In light of this distinction, the use of real property
by a veterans' organization, as specified, for fraternal,
lodge, or social club purposes is central to that
organization's exempt purposes and activities; and,
c) The use of real property by a veterans' organization, as
specified, for fraternal, lodge, or social club purposes
constitutes the exclusive use of that property for a
charitable purpose within the meaning of Section 4(b) of
Article XIII of the California Constitution.
5)Contains additional legislative findings and declarations
relating to the history of congressionally chartered veterans'
organizations and the interpretation of Revenue and Taxation
Code (R&TC) Section 215.1 by the Chief Counsel of the State
Board of Equalization (BOE).
6)Provides that the state shall not reimburse any local agency
for any property tax revenues lost by it pursuant to this
bill.
7)Takes effect immediately as a tax levy.
EXISTING FEDERAL LAW:
1)Defines an organization as tax-exempt under IRC Section
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501(c)(3) if the organization is organized and operated
exclusively for exempt purposes set forth in IRC Section
501(c)(3). The organization must not be organized or operated
for the benefit of private interests, and no part of the
organization's net earnings may inure to the benefit of any
private shareholder or individual. In addition, it may not be
an action organization, i.e., it may not attempt to influence
legislation as a substantial part of its activities and it may
not participate in any campaign activity for or against
political candidates. Organizations described in IRC Section
501(c)(3) are commonly referred to as charitable
organizations. Organizations described in IRC Section
501(c)(3), generally, are eligible to receive tax-deductible
contributions in accordance with IRC Section 170.
2)Defines a post or an organization of past or present members
of the Armed Forces of the United States (U.S.) as tax-exempt
under IRC Section 501(c)(19) if the post or organization:
a) Is organized in the U.S. or any of its possessions;
b) At least 75% of the members of which are past or present
members of the Armed Forces of the U.S. and substantially
all of the other members of which are individuals who are
cadets or are spouses, widows, widowers, ancestors, or
lineal descendants of past or present members of the Armed
Forces of the U.S. or of cadets; and,
c) No part of the net earnings of which inures to the
benefit of any private shareholder or individual.
EXISTING STATE LAW:
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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
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 a property tax exemption for all buildings and real
property exclusively used for charitable purposes by a
veterans' organization that is: (a) chartered by the U.S.
Congress, and (b) organized and operated for charitable
purposes. In order to obtain the exemption, the organization
must file a claim with the county assessor.
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FISCAL EFFECT: The State Board of Equalization (BOE) staff
estimates that this bill will result in an annual revenue loss
of $575,000.
COMMENTS:
1)The Author's Statement . The author has provided the following
statement in support of this bill:
"To honor California's promise to our brave veterans, I have
introduced SB2 which will align state law with federal law
exempting Veterans Halls from property taxes. Veterans Halls
provide an invaluable sense of community for active duty,
veterans and military families to provide emotional support to
one another.'
"The camaraderie found in Veterans Halls is tremendously
important, especially for making a healthy transition from
active duty back into civilian life. Throughout our history,
Veterans Halls have also served important functions for our
communities by serving as public meetings places, memorials
and public educational centers.
"Veteran's service organizations were originally chartered by
congress and were never intended to pay taxes. California is
currently the only state where not all Veterans Halls are
eligible for property tax exemption. Because Veterans Halls
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are typically non-profit and run through charitable donations,
property taxes create a heavy financial burden on these
organizations.
"Due to this financial hardship, many Veterans Halls in our
community are limited in resources and in the worst case must
shut down. Essentially, many Veterans Halls are closing due to
a technicality in the current tax code.
"SB 2, which passed the Senate unanimously, would align
statute to reflect the unique nature of these veterans'
service organizations as Congressionally-chartered
organizations required to serve social purposes. It would
provide clarity to counties to preserve the important property
tax exemptions guaranteed to these organizations, and ensure
they have the tools they need to continue serving those who
have given up so much for our freedom.
"I am convinced that circumstances this year are such that the
cost of this clarification for the benefit it confers is not
only absorbable, but offers us the right time finally to do
the right thing for our veterans."
2) Arguments in Support . The proponents of this bill state that
veterans' organizations should not be denied the property tax
exemption because of the occasional rental of their property
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for events in their communities. The proponents also argue
that this bill addresses "an issue of great importance to many
veterans service organization's posts and chapters to ensure
that as non-profit organizations, existing property tax
exemptions for veteran halls are preserved." Finally, the
proponents note that this bill "would ease the administration
of the exemption."
3)The Welfare Exemption . The California Constitution provides
that all property is taxable, unless explicitly exempt 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 the property's ownership
changes.
The California Constitution allows the Legislature to establish
a property tax exemption for property: (a) exclusively used
for religious, hospital, or charitable purposes; (b) owned by
nonprofit entities organized and operated for charitable
purposes; and (c) which had no part of its net earnings inure
to the benefit of any private shareholder or individual.
[California Constitution, Article XIII, Section (4)(b).] This
exemption, commonly known as the "welfare exemption," was
adopted by the voters as a constitutional amendment on
November 7, 1944. In 1945, the Legislature enacted the
exemption, providing that a qualifying nonprofit
organization's property may be exempt fully or partially from
property taxes, depending on how much of the property is used
for qualified purposes and activities. [R&TC Section 214.] In
order to be eligible for the exemption, the property must be
used for the actual operation of the exempt activity and may
not exceed an amount of property reasonably necessary to
accomplish the exempt purpose. The property may not be used
to benefit the owner or any other person and must be
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irrevocably dedicated to charitable purposes, except in
specified circumstances. The property of a non-profit
organization used for fraternal, lodge, or social club
purposes does not qualify for the exemption, unless the use is
clearly incidental to the organization's charitable purpose.
4)The Veterans' Organization Exemption: Background . Property
owned by a veterans' organization chartered by the U.S.
Congress is eligible for the welfare exemption, provided that
the organization complies with all applicable requirements, is
exempt from tax under federal and state law, and has a
"veterans' organization exemption" certificate of compliance
on file with the county assessor. The majority of veterans'
organizations are ineligible for exemption because another
provision of the law - R&TC Section 214(a)(5) - disqualifies
property if it is used for fraternal, lodge, or social
purposes. In practice, only small portions of property owned
by veterans' organizations actually receive the property tax
exemption. Buildings owned by Veterans of Foreign Wars and
the American Legion often have many uses, some of which are
social in nature. As a result, the application of the
veterans' organization exemption is inconsistent from county
to county. Some counties assess the entire property; others
do not assess the property at all; and still others exempt
just the office and facilities that directly serve veterans,
such as counseling rooms used for readjustment services.
According to the BOE analysis of this bill, R&TC Section 215.1,
which provides for the veterans' organization exemption, was
added by AB 184 (Powers) in 1972 (Chapter 151, Statutes of
1972). The BOE opposed AB 184 and, in a letter sent to
Governor Reagan, explained, "While AB 184 implies that the
activities of veterans' organizations are charitable, it does
no directly so state?. This curious construction invites
litigation. If a tax benefit is to be granted, it should be
clear as to what that benefit is." The BOE noted several
potential interpretations of the language in AB 184. First,
AB 184 may be viewed as the creation of a new exemption that
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would be invalid without the support of a constitution
amendment. Alternatively, AB 184 may be viewed as merely
"permitting veterans' organizations to receive the welfare
exemption if they meet the traditional concepts of charity and
otherwise satisfy other welfare exemption requirement," in
which case AB 184 is "an exercise in futility since it is
highly doubtful that any organization could qualify."
Finally, AB 184 may be viewed as "a vague attempt to expand
the concept of charity so as to permit veterans' organizations
to receive the benefit of the welfare exemption." This
interpretation is also of "doubtful constitution validity."
The Governor, however, signed AB 184 into law.
While many veterans' organizations applied for the new
exemption, the BOE denied all the claims.<1> Representatives
of veterans' organizations subsequently protested the denials
before the BOE on January 4, 1974. Ultimately, this exemption
"was extended to a limited portion of the entire veterans'
organization property, such as the counseling rooms used for
readjustment services, post-traumatic stress disorders, and
alcohol or drug assistance programs."
The BOE staff notes the veterans' organization exemption has had
little practical effect since relatively few properties owned
by veterans' organizations currently receive the exemption,
and those that do are only receiving a partial exemption on a
small part of their property. In fact, only about 50
organizations currently apply for the exemption and a number
of these receive a partial exemption, generally on the office
or counseling rooms used for readjustment services,
post-traumatic stress disorders, and alcohol or drug
assistance programs. The majority of property consists of a
club room, auditorium, restaurant, and bar which are not
eligible for the property tax exemption, except where the use
is clearly incidental to a primary charitable purpose.
---------------------------
<1>
http://www.boe.ca.gov/proptaxes/pdf/870_0001.pdf
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5)Slippery Slope ? While this bill provides tax relief to
veterans' organizations, it sets a precedent for other groups
to seek similar property tax exemptions. As stated in the BOE
analysis of this bill, lodges and clubs owned by the Elks,
Moose, Oddfellows, and Rotary, etc., are not exempt from
taxation. The Committee may wish to consider whether the
activities of U.S. Congress-chartered veterans' organizations
significantly differ from community services performed by
similarly situated non-profit organizations and whether the
difference warrants a disparate tax treatment of properties
owned by those organizations.
6)Constitutional Concerns . The language of the Constitution is
clear that the qualifying property must be owned, operated and
used by a nonprofit entity for exempt purposes and activities,
and no part of the entity's net earnings may inure to the
benefit of any private shareholder or individual. Property
must be used exclusively for religious, hospital, or
charitable purposes. In 1973, the Attorney General opined
that R&TC Section 251.1 (which is proposed to be amended by
this bill) was constitutional because it contained an
additional eligibility requirement, namely, a requirement to
meet all of the provisions of R&TC Section 214(a)(1) - (7).
In this connection, subparagraph (5) of Section 214(a)
mandates that the property be not used for fraternal or lodge
purposes or for social club purposes, except where that use is
clearly incidental to a primary religious, hospital,
scientific or charitable purpose. SB 2 proposes to delete
this requirement, which puts in question the constitutionality
of Section 251.1, as proposed to be amended.
Furthermore, this bill finds that in the case of veterans,
partly because of their service to this country, the social
gatherings and meetings serve a "charitable purpose." And
lodge and social club activities support the central
charitable purpose of veterans' organizations. However, the
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Legislature, by making this finding and authorizing the
veterans' organization exemption for those types of property,
may be exceeding its authority under Section 4 of Article XIII
of the California Constitution relating to property tax
exemptions.
7)Related Legislation .
a) SB 1152 (Anderson), of the 2013-14 Legislative Session,
was substantially similar to this bill. SB 1152 was held
on this Committee's Suspense File.
b) SB 1469 (Johannessen), of the 2001-02 Legislative
Session, would have provided that property is still
eligible for the veterans' organization exemption if the
only reason for disqualification is that the property is
occasionally made available for private rentals as a
service to the community. SB 1469 was never heard by the
Senate Revenue and Taxation Committee.
REGISTERED SUPPORT / OPPOSITION:
Support
American Legion-Department of California
AMVETS-Department of California,
California Assessors' Association
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California Association of County Veterans Service Officers
California Council of Chapters
California State Commanders Veterans Council
Military Officers Association of America
San Diego Regional Chamber of Commerce
Veterans of Foreign Wars (VFW), Department of California
Vietnam Veterans of America-California State Council
One private individual
Opposition
None on file
Analysis Prepared by:Oksana Jaffe / REV. & TAX. / (916)
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319-2098