BILL ANALYSIS �
SB 1152
Page 1
Date of Hearing: June 25, 2014
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
SB 1152 (Anderson) - As Amended: June 18, 2014
Majority vote. Tax levy. Fiscal committee.
SENATE VOTE : 36-4
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. Specifically, this bill :
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)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.
3)Includes 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,
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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;
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.
4)Provides that the state shall not reimburse any local agency
for any property tax revenues lost by it pursuant to this
bill.
5)Takes effect immediately as a tax levy.
EXISTING FEDERAL LAW defines an organization as tax-exempt under
Internal Revenue Code (IRC) Section 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.
EXISTING STATE 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
property at 1% of full cash value.
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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.
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:
"Veteran halls in communities across our country are an
invaluable resource for millions of active military, veterans,
and their families. Due to skyrocketing operation and
business costs, the number of veteran halls has declined and
the fewer military families are receiving the much-needed
services they provide. This bill would correct confusion in
state statute to ensure that as non-profit organizations,
existing property tax exemptions for veteran halls are
preserved so that they can continue to provide high quality
and important services to the heroes who have served our
country."
2)Arguments in Support . The proponents of this bill state that
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veterans' organizations should not be denied property tax
exemption because of the occasional rental of their property
for events in their communities. The proponents also doubt
the accuracy of the revenue loss estimates, arguing that
facilities owned by veterans' organizations are often not in
"the greatest of conditions and are ? normally very old."
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
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
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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 is ineligible for exemption because another
provision of the law - R&TC Section 214(a)(5) - disqualifies
property if 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,
it may be viewed as the creation of a new exemption that would
be invalid without the support of a constitution amendment.
Alternatively, it 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 it
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. Representatives of
veterans' organizations subsequently protested the denials
before the BOE on January 4, 1974. Ultimately, this exemption
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"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.
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
similar 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. 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. The
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
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of the California Constitution relating to property tax
exemptions.
REGISTERED SUPPORT / OPPOSITION :
Support
California Assessors' Association
One individual
Lawson Stuart, Chair of Veterans Caucus, California Democratic
Party
American Legion-Department of California
AMVETS-Department of California
California Association of County Veterans Service Officers
California State Commanders Veterans Council
Military Officers Association of America
California Council of Chapters,
VFW, Department of California
Vietnam Veterans of America-California State Council
Opposition
None on file
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098