California’s Welfare Exemption Explained
The California Legislature has the authority to exempt property (1) used exclusively for religious, hospital, scientific, or charitable purposes, and (2) owned or held in trust by nonprofit organizations operating for those purposes. This exemption is known as the Welfare Exemption. The State Board of Equalization (“BOE”) oversees the administration of California’s property tax system.
Who can qualify for the Welfare Exemption?
In general, the Welfare Exemption from local property taxes is available for property of organizations:
Formed and operated exclusively for qualifying purposes (religious, scientific, hospital, or charitable),
That use their property exclusively for those qualifying purposes, and
That have a current tax exempt letter from the Internal Revenue Service or the Franchise Tax Board.
California law further requires the organization’s formation documents to contain a statement that the organization’s property is irrevocably dedicated to one or more qualifying purposes (i.e., charitable, hospital, religious, scientific), and that in the event the organization stops operating, that the assets will be transferred to another fund, foundation, or corporation organized and operated for similar purposes. BOE Publication 149 (Exhibit C) provides examples of irrevocable dedication and dissolution clauses.
The above requirements, along with others, must be met for the exemption to be granted. The nonprofit organization must be a community chest, fund, foundation, corporation, or eligible limited liability company.
Who administers the Welfare Exemption?
The Welfare Exemption is unique in that it is co-administered by the county assessors and the BOE. The BOE determines whether the organization itself is eligible for the exemption (that is, is the organization organized and operated exclusively for one or more of the qualifying purposes—religious, scientific, hospital, or charitable?). The county assessor determines whether an organization’s specific property qualifies for the exemption based on the property’s use (that is, is the property used exclusively for religious, scientific, hospital, or charitable purposes?). In accordance with California Revenue and Taxation Code section 254.5(b)(2), the assessor may institute an audit or verification of the property's use to determine whether both the owner and user of the property meet the requirements of Revenue and Taxation Code section 214.
General Filing Requirements for the Welfare Exemption
Claims for the Welfare Exemption must be filed annually with the county assessor in the county in which the organization’s property is located or being used. The claim form and any required supplemental affidavits may be obtained from the county assessor’s office. The county assessor determines whether the property qualifies for the Welfare Exemption based on “how the property is used.” However, the county assessor may not grant the exemption unless the organization already has a valid Organizational Clearance Certificate issued by the BOE.
Therefore, an organization seeking exemption for the first time must:
File a claim for an Organizational Clearance Certificate and, where applicable, a Supplemental Clearance Certificate for Limited Partnership, Low-Income Housing Property—Welfare Exemption, with the BOE; and
File a claim for the Welfare Exemption with the county assessor in the county where the property is located or used. The local assessor’s office will provide the forms to file for the Welfare Exemption. If an organization has property in different counties, a separate form must be filed with each county assessor.
If your organization needs assistance in seeking the Welfare Exemption, please contact Jonathan Grissom, an attorney dedicated to the representation of nonprofits.