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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