Existing property tax law provides, with respect to property as to which the college, cemetery, church, religious, exhibition, veterans organization, free public libraries, free museums, public schools, community colleges, state colleges, state universities, tribal housing, or welfare exemption was available but for which a timely application for exemption was not filed, that 90% of any tax or penalty or interest on that property shall be canceled or refunded if an appropriate application for exemption is filed on or before the lien date in the calendar year next succeeding the calendar year in which the exemption was not claimed by a timely application.

Existing property tax law requires, if an appropriate application for exemption is filed within 90 days from the first day of the month following the month in which the property was acquired or by February 15 of the following calendar year, whichever occurs first, any tax or penalty or interest imposed upon property owned by any organization qualified for the college, cemetery, church, religious, exhibition, veterans organization, tribal housing, or welfare exemption that is acquired by that organization during a given calendar year, after the lien date but before the first day of the fiscal year commencing within that calendar year, if the property is of a kind that would have been qualified for the college, cemetery, church, religious, exhibition, veterans organization, tribal housing, or welfare exemption if it had been owned by the organization on the lien date, to be canceled or refunded.

This bill would add public schools to the list of entities eligible for the cancellation or refund of any tax or penalty or interest imposed on property acquired in a given calendar year after the lien date but before the first day of the fiscal year commencing within that calendar year. The bill also would make conforming changes.

By increasing the duties of local officials relative to the administration of taxes, this bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that, if the Commission on State Mandates determines that the bill contains costs mandated by the state, reimbursement for those costs shall be made pursuant to these statutory provisions.

Existing property tax law provides, with respect to property as to which the college, cemetery, church, religious, exhibition, veterans organization, free public libraries, free museums, public schools, community colleges, state colleges, state universities, tribal housing, or welfare exemption was available but for which a timely application for exemption was not filed, that 90% of any tax or penalty or interest on that property shall be canceled or refunded if an appropriate application for exemption is filed on or before the lien date in the calendar year next succeeding the calendar year in which the exemption was not claimed by a timely application.

Existing property tax law requires, if an appropriate application for exemption is filed within 90 days from the first day of the month following the month in which the property was acquired or by February 15 of the following calendar year, whichever occurs first, any tax or penalty or interest imposed upon property owned by any organization qualified for the college, cemetery, church, religious, exhibition, veterans organization, tribal housing, or welfare exemption that is acquired by that organization during a given calendar year, after the lien date but before the first day of the fiscal year commencing within that calendar year, if the property is of a kind that would have been qualified for the college, cemetery, church, religious, exhibition, veterans organization, tribal housing, or welfare exemption if it had been owned by the organization on the lien date, to be canceled or refunded.

This bill would add public schools to the list of entities eligible for the cancellation or refund of any tax or penalty or interest imposed on property acquired in a given calendar year after the lien date but before the first day of the fiscal year commencing within that calendar year. The bill also would make conforming changes.

By increasing the duties of local officials relative to the administration of taxes, this bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that, if the Commission on State Mandates determines that the bill contains costs mandated by the state, reimbursement for those costs shall be made pursuant to these statutory provisions.

Date of Hearing: April 27, 2015

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Philip Ting, Chair

ABPCA Bill Id:AB 748

Author:(Lackey) – As Amended Ver: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 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 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:

   1. 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)];

   2. 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)];

   3. An acquisition of property by a qualified organization after the beginning of the fiscal year [R&TC Section 271(a)(3)]; and,

   4. 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.

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 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 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 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 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 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.

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 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.4^th 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 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 exemption¹. 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 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.4^th 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:

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