Posted on August 16, 2011

Increased Scrutiny of California Nonprofits Leads to Fewer Property Tax Exemptions

State budget woes may be responsible for a growing number of nonprofit groups in California being denied property tax exemptions, the New York Times reports.

Although no one knows how many nonprofits have been affected or why the exemption is emerging as an issue now, lawyers representing some of the affected groups told the Times that the state's chief tax collector has told them that they don't provide enough in the way of benefits to residents of the state. Indeed, as tax revenues have fallen while demand for public services has increased over the past several years, state and local government officials in other parts of the country have been taking a hard look at nonprofits and the various tax exemptions they receive. Last year, the state of Hawaii tried — and failed — to impose a 1 percent tax on nonprofits, while the city of Boston has asked nonprofits to pay what is in effect a discounted property tax.

In California, county assessors are charged with determining whether property owned by a nonprofit is used in a way that is of "primary benefit" to the state — a term that has been variously interpreted by the state's fifty-eight counties. Several nonprofit organizations with large properties in the state continue to receive a property tax exemption even though more than half their funding serves people living outside California. One of them, Direct Relief International, supplies drugs and medical equipment to countries around the world but does not pay property taxes on its building or warehouse in Santa Barbara. Similarly, two properties in Los Angeles Country owned by World Vision International, a Christian relief and development agency, are exempt from property taxes, as are the properties of Stanford University and the Kaiser Foundation Hospitals, two of the biggest nonprofits in the state.

Ofer Lion, a lawyer who is representing a nonprofit client with "a global outlook" in a property tax exemption dispute, told the Times that the primary benefit rule "clearly [is] a violation of the commerce clause of the Constitution, and, it may also be a violation of the equal protection clause, given the uneven application of the standard."