Original Notice.

     Preproposal statement of inquiry was filed as WSR 07-15-094.

     Title of Rule and Other Identifying Information: WAC 458-16-270 Schools and colleges, this rule explains the property tax exemption for nonprofit schools and colleges and for not-for-profit foundations that support institutions of higher education, authorized in RCW 84.36.050 as amended in 2006.

     Hearing Location(s): Capital Plaza Building, 4th Floor, Executive Large Conference Room, 1025 Union Avenue S.E., Olympia, WA, on August 4, 2009, at 10:00 a.m.

     Date of Intended Adoption: August 11, 2009.

     Submit Written Comments to: James A. Winterstein, P.O. Box 47471, Olympia, WA 98504-7471, e-mail JimWi@dor.wa.gov, fax (360) 586-7602, by August 4, 2009.

     Assistance for Persons with Disabilities: Contact Martha Thomas no later than ten days before the hearing date, TTY 1-800-451-7985 or (360) 725-7497.

     Purpose of the Proposal and Its Anticipated Effects, Including Any Changes in Existing Rules: This rule has been substantially revised and updated to recognize legislative changes that were enacted in chapter 226, Laws of 2006 (SHB 2804). The rule expands the exemption for nonprofit schools and colleges to include specified use of the property by parties other than the school or college.

     Reasons Supporting Proposal: The rule has not been updated since the amendment of the statute, RCW 84.36.050, in 2006. The proposed rule will incorporate the changes in the law.

     Statutory Authority for Adoption: RCW 84.36.865, 84.36.040, and 84.36.050.

     Statute Being Implemented: RCW 84.36.050.

     Rule is not necessitated by federal law, federal or state court decision.

     Name of Proponent: Department of revenue, governmental.

     Name of Agency Personnel Responsible for Drafting: James A. Winterstein, 1025 Union Avenue S.E., Suite #544, Olympia, WA, (360) 570-5880; Implementation and Enforcement: Brad Flaherty, 1025 Union Avenue S.E., Suite #200, Olympia, WA, (360) 570-5860.

     No small business economic impact statement has been prepared under chapter 19.85 RCW. A small business economic impact statement is not required for the reason that the rule does not impose any new performance requirement or administrative burden on any small business.

     A cost-benefit analysis is not required under RCW 34.05.328. The proposed rule is not a significant legislative rule as defined by RCW 34.05.328.

June 29, 2009

Gilbert W. Brewer

Assistant Director

Interpretations and

Technical Advice Division

OTS-2476.1

AMENDATORY SECTION(Amending WSR 01-24-037, filed 11/28/01, effective 12/29/01)

WAC 458-16-270   Schools and colleges.   (1) Introduction. This ((rule)) section explains the two property tax exemptions available under the provisions of RCW 84.36.050. The first exemption applies to property owned ((by)) or used by or for a nonprofit school or college ((and to)). The second exemption is for property owned by a not-for-profit foundation established for the exclusive support of an institution of higher education, as defined in RCW 28B.10.016, that is leased to and used by the institution. Nonprofit schools, colleges, and not-for-profit foundations seeking a property tax exemption under RCW 84.36.050 must also comply with the relevant requirements of RCW 84.36.805 and 84.36.840. (See subsection (9) of this section.)

     (2) Definitions. For purposes of this ((rule)) section, the following definitions apply:

     (a) "((Campus or)) College or campus purposes" means principally designed to further the educational, athletic, or social functions of an institution of higher education, as defined in RCW 28B.10.016, and only applies to property that is ((only needed because of the presence of the nonprofit school or college and is principally designed to further the educational purposes and functions of a nonprofit school or college or an institution of higher education, as defined in RCW 28B.10.016)) owned by a not-for-profit foundation and leased to and used by such an institution.

     (b) "Cultural or art ((education)) educational program" ((includes and is limited to)) means:

     (i) An exhibition or presentation of works of art or objects of cultural or historical significance, such as those commonly displayed in art or history museums;

     (ii) A musical or dramatic performance or series of performances; or

     (iii) An educational seminar or program, or series of such programs, offered by a nonprofit school or college to the general public on an artistic, cultural, or historical subject. (See RCW 82.04.4328(2).)

     (c) "Educational, social and athletic programs" or "educational, social and athletic functions" individually or collectively mean those programs offered or functions performed by or for the school or college in each such general area, including, but not limited to, those illustrated by the examples set forth in this definition, and including educational, social, and athletic programs and functions sponsored or cosponsored by the school or college, offered by others on school or college-owned property in a manner consistent with the school or college's programs, and such programs and functions on school or college property that may involve alumni and community members.

     (i) Examples of educational programs and functions include, in addition to those described in the definition of "educational purposes" in (d) of this subsection: Classes, seminars, conferences, providing instructional support to students and other participants in such programs and functions, and programs and functions that utilize and apply the academic and instructional resources and facilities of the school or college, including related administrative and support activities for these programs and functions.

     (ii) Examples of athletic programs and functions include: Physical training, sport events and practices, athletic camps, and use of school or college recreational and fitness resources and facilities by students, alumni, faculty, staff, or third parties, including related administrative and support activities, which use the property in a manner consistent with the school or college's programs.

     (iii) Examples of social programs or functions include activities engaged in by or for the school or college that further the health, safety, well being, emotional growth, welfare, psychological development, socialization, preparation and training for participation in society, development of adaptive skills and cultural awareness and related activities for students including, but not limited to, theatrical or musical performances, artistic, cultural, or technology exhibits or fairs, events, presentations and programs providing students with information about and access to goods and services they need while a student at the school or college.

     (d) "Educational purposes" means, in addition to the educational programs and functions described in (c) of this subsection, systematic instruction, either formal or informal, in any and all branches of learning directed to an indefinite class of persons and from which a substantial public benefit is derived. The term includes all purposes that seek to promote or advance education.

     (((d))) (e) "Schools and colleges" means:

     (i) Nonprofit educational institutions that are approved by the superintendent of public instruction or whose students and credentials are accepted without examination by schools and colleges established under either Title 28A or 28B RCW and offer students an educational program of a general academic nature; or

     (ii) ((An institution of higher education, as defined in RCW 28B.10.016; or

     (iii))) Nonprofit institutions that meet the following criteria:

     (A) They have a definable curriculum and measurable outcomes for a specific group of students;

     (B) They have a qualified or certified faculty;

     (C) They have facilities and equipment that are designed for the primary purpose of the educational program;

     (D) They have an attendance policy and requirement;

     (E) They have a schedule or course of study that supports the instructional curriculum; and

     (F) They are accredited, recognized, or approved by an external agency that certifies educational institutions and the transferability of courses.

     (((e) "Revenue")) (f) "Net income" means ((income)) the amount received from the loan or rental of exempt property ((when the income)) that exceeds the amount of the maintenance and operation expenses, as defined in WAC 458-16-165, attributable to the portion of the property loaned or rented.

     (g) "Pecuniary gain" means the generation of monetary receipts from commercial operations or other sales activities, when those receipts exceed expenses of operations or are intended to exceed expenses of operations.

     (h) "Religious faculty" means a person who:

     (i) Teaches at a school or college; and

     (ii) Is a member of the clergy or a religious order or officially invested with ministerial or priestly authority, as distinguished from laity.

     (i) "Third parties" means individuals, groups, organizations, associations, corporations, and entities other than the school or college to which an exemption is granted under this section.

     (3) Exemption - nonprofit schools or colleges. Property owned or used by or for any nonprofit school or college within this state is exempt to the extent that it is used ((exclusively)) for educational purposes or cultural or art educational programs.

     (a) Real property exempt under this ((rule)) section cannot exceed four hundred acres ((and must be used exclusively for school, college, or campus purposes)). The exempt property includes, but is not limited to:

     (i) Buildings and grounds principally designed for the educational, athletic, or social programs or functions of the ((nonprofit)) school or college ((and the need for which would be nonexistent except for the existence of the school or college));

     (ii) Buildings that house part-time or full-time students, religious faculty, or the chief administrator of the school or college;

     (iii) Buildings ((that house religious faculty)) used for athletic activities of the school or college; and

     (iv) ((Buildings that house the chief administrator)) All other school or college facilities, such as maintenance facilities, heating plants, storage facilities, security services facilities, food services facilities, transportation facilities, administrative offices, or a student union building or student commons, which are needed because of the presence of the school or college.

     (b) ((The use of exempt property by professional organizations for conferences, seminars, or other activities that enhance the reputation of the nonprofit school or college will not nullify the exemption. Similarly, the use of exempt property owned by a nonprofit school or college for any education purpose will not nullify the exemption.

     (c))) With respect to all property that is not part of, or contiguous to, the main campus of a school or college and for which the institution wishes to obtain an exemption ((under this rule)), the department may require ((said)) the institution to provide, in detail, the following information:

     (i) The names of courses taught or a description of the educational purposes or cultural or art educational programs taking place at the off-campus site;

     (ii) A calendar of dates and times that shows how the subject property ((was)) is used; and

     (iii) The number of students ((that participated)) who participate in the educational activities or cultural or art educational programs conducted at the off-campus site.

     (((d) To be eligible to receive this exemption, the nonprofit school or college must be open to all persons regardless of race, color, national origin, or ancestry. However, there is no limitation on the type of courses the institution may offer.

     (4) Property leased to a nonprofit school or college. If property is leased to a nonprofit school or college, in order to be exempt, the property must be:

     (a) Irrevocably dedicated to the purpose for which exemption has been granted; and

     (b) The benefit of the exemption must inure to the user.

     (c) For example, if a private citizen leases real or personal property to a nonprofit school or college to be used for educational purposes or cultural or art educational programs, the leased property may qualify for exemption if it meets the requirements of subsection (3)(a), (b), and (c) of this rule.

     (5) Production of financial records - nonprofit schools or colleges. In addition to the financial records that must be produced to comply with the requirements of WAC 458-16-165, a nonprofit school or college claiming exemption under this rule must annually submit a detailed summary containing the following information regarding the previous calendar year:

     (a) A list of all property that it claimed was exempt;

     (b) The purpose for which the property was used;

     (c) The income derived from the property;

     (d) The manner in which the income received was applied;

     (e) The number of students who attended the school or college;

     (f) The total income of the school or college and the sources from which it was derived; and

     (g) The purposes to which the total income of the school or college was applied including, but not limited to, all income received and expenditures made.

     (6))) (c) If property is leased to a school or college, in order to be exempt, the benefit of the exemption must inure to the school or college.

     (4) Exemption - property owned by a not-for-profit foundation that is leased to and used by an institution of higher education. RCW 84.36.050 also provides a property tax exemption to real or personal property owned by a not-for-profit foundation ((that is)) established for the exclusive support of an institution of higher education, as defined in RCW 28B.10.016((, if it is)). The property must be leased to and used by the institution ((exclusively)) for ((campus or)) college or campus purposes and ((is)) it must be principally designed to further the educational, athletic or social functions of the institution.

     (a) An institution of higher education is defined in RCW 28B.10.016 as synonymous with "postsecondary institutions" and means the University of Washington, Washington State University, Western Washington University at Bellingham, Central Washington University at Ellensburg, Eastern Washington University at Cheney, The Evergreen State College, the community colleges, and the technical colleges.

     (b) The exemption can only be obtained for property actively utilized by currently enrolled students.

     (c) The benefit of the exemption must inure to the educational institution using the exempt property.

     (5) Uses of the exempt property that affect the exemption - exceptions. For purposes of the school and college exemption:

     (a) If exempt property is used by a third party entitled to a property tax exemption, the property remains exempt as long as the amount of rent or donations received by the school or college for that use does not result in net income.

     (b) If exempt property is used by a third party not entitled to a property tax exemption, for pecuniary gain or to promote business activities, then the property, or portion so used, is taxable for the entire assessment year in which the nonqualifying use occurs and will remain taxable until a new application is filed with the department and approved, except as otherwise provided in this subsection, and subsection (6) of this section (nonqualifying inadvertent use), and subject to the provisions of subsection (9) of this section. When exemption is denied for only a portion of the school or college's property, any renewal application need only address that portion denied, not the entire property.

     (c) There are three general exceptions to the loss of exemption when exempt property is used by a third party not entitled to a property tax exemption, which exceptions are described in (i), (ii), and (iii) of this subsection (5)(c), as follows:

     (i) If exempt property is used by students, alumni, faculty, staff, or other third parties in a manner consistent with the educational, social, or athletic programs of the school or college, including property used for related administrative and support functions, and not for pecuniary gain or to promote business activities, then the property remains exempt.

     (ii) When the school or college contracts with and permits the use by third parties of exempt property to provide school or college-related programs or services directed at students, faculty, and staff, and not primarily at the general public, then the property remains exempt, regardless of whether payment for the programs or services is made to such third party by the school or college, or by program participants or service recipients, and regardless of whether the use by the third party results in pecuniary gain for the third party or the promotion of the third party's business. Examples of such programs or services include school or college educational, social and athletic programs and functions; the provision of food services, including snack and coffee bars, food or bottled drink vending machines, or on-campus catering services for school or college events; placement of an automated teller machine on exempt property; the operation of a bookstore on campus that sells textbooks and other student oriented items; and the provision of maintenance, operational, or administrative services.

     (iii) If exempt property is used for pecuniary gain or to promote business activities for seven days or less each calendar year by third parties who are not entitled to a property tax exemption, the property remains exempt. Disqualifying use of more than seven days is measured separately with respect to each specific portion of the exempt property used, and is cumulative with respect to each such separate portion each year for all such third party use. For example, if a classroom in a building is used by three separate third parties for disqualifying uses on three separate occasions in one calendar year for periods of two, three, and five days respectively (for a total of ten days of disqualifying use), that classroom, but not the entire floor or building, loses its exemption for that calendar year. By contrast, if the five day disqualifying use occurred in a different portion of the building, such as an auditorium, neither the classroom nor the auditorium would be disqualified, since neither portion of the building would have been used for a disqualifying use for more than seven days in that year. This seven day limitation does not apply when exempt property is used as or for a sports or educational camp or program that is taught, operated, or conducted by a faculty member who is required or permitted to do so as part of his or her compensation package, whether or not participants pay a fee directly to such faculty member.

     (6) Effect of inadvertent use in a nonqualifying manner. If property exempt under this section is inadvertently or accidentally used in a manner inconsistent with the purposes for which the exemption was granted, the exemption will not be nullified unless the use is part of a pattern of nonexempt use. A pattern of nonexempt use is presumed when an inadvertent or accidental use is repeated in the same assessment year or in two or more successive assessment years.

     (7) ((Additional requirements. Any organization, association, corporation, or foundation that applies for a property tax exemption under this rule must also comply with the provisions of WAC 458-16-165. WAC 458-16-165 sets forth additional conditions and requirements that must be complied with to obtain a property tax exemption under RCW 84.36.050.)) Examples of uses that do not nullify the exemption. In order to clarify the property tax exemption for schools and colleges, this subsection describes and gives examples of the types of use by third parties not entitled to a property tax exemption that do not nullify the tax exempt status of property owned or used by or for a school or college. The following examples should be used only as a general guide. The tax results of other specific situations must be determined after a review of all of the facts and circumstances. In the following examples, as long as any rent or donation associated with the use does not result in net income to the school or college, the exemption is not affected.

     (a) Exempt property is used by students, alumni, faculty, staff, or other third parties for weddings, anniversary celebrations, family or school reunions, funeral services, or similar events. These uses are consistent with the educational or social programs of the school or college and the property remains exempt. The property remains exempt even when the persons or groups using the school or college property for such an event also hire persons such as a caterer, a musical group, or a wedding photographer specifically for the event.

     (b) Exempt property is used by third parties, such as members of the community, for lectures, presentations, musical recitals, seminars, debates, or similar educational activities. If the third party use is contracted for and permitted by the school or college, for example when the school or college pays the presenter directly, or when the participants or patrons pay the presenter directly, there is no loss of exemption, as long as the uses are consistent with the educational, social, or athletic programs of the school or college. The presenter may also offer for sale, at the time of the presentation, books, tapes, CDs or similar items that relate directly to the presentation.

     (c) Exempt property is used by third parties such as students, alumni, faculty, staff, or members of the community for athletic activities or events on sports fields, tennis courts, and in buildings used for athletics. These uses are consistent with the athletic programs of the school or college and the property remains exempt as long as the property is not used for third party pecuniary gain or to promote business activities. (The example is intended only to illustrate the application of the exception set forth in subsection (5)(c)(i) of this section, and should be distinguished from the exception described under subsection (5)(c)(ii) of this section which permits the generation of third party pecuniary gain in certain identified circumstances.) Any fees, charges, rents, donations or other remuneration for the use of the school or college exempt facilities may not result in net income.

     (d) Exempt property is used by third parties for educational or instructional programs, such as private instruction, tutoring, driving instruction, English as a second language or other language courses, examination preparation, or other similar programs. These programs are consistent with the educational programs of the school or college and the property remains exempt as long as the property use is contracted for and permitted by the school or college and the uses are consistent with the educational programs of the school or college.

     (e) Exempt property, such as student housing, is used for purposes of recruiting prospective students. Exempt school or college facilities, when not being used by currently enrolled students, are offered by the school or college to third parties for educational programs consistent with the educational purposes of the school or college. Such uses are consistent with the educational programs of the school or college and the property remains exempt.

     (f) A school or college provides courses in vocational-technical skills, such as culinary arts, hotel management, automotive mechanics, or cosmetology. As a part of the course work, students obtain practical experience by providing products or services to the public. As long as the charge to the public for these products or services is exclusively used for the school or college's educational, social, or athletic programs, this use of exempt property is consistent with the school's educational programs and functions and will not result in the loss of exemption.

     (g) Exempt property is used by a bank or credit union in a school or college student orientation program of limited duration and not more than one time each year, through which students receive information from a variety of local businesses about services that they may need while attending a school or college. This is considered to be a social or educational program of the school or college and is not a disqualifying use.

     (h) The school or college contracts with and permits third parties to use exempt property to conduct fund-raising activities when the funds raised will be used for educational purposes or cultural or art educational programs of the school or college. Such activities must be conducted in accordance with the provisions of WAC 458-16-165.

     (8) Examples of disqualifying use. In order to clarify the property tax exemption for schools and colleges, this subsection describes and gives examples of the types of use by third parties not entitled to a property tax exemption that will nullify the tax exempt status of property owned or used by or for a school or college. The following examples identify a number of facts and then state a conclusion. These examples should be used only as a general guide. The tax results of other specific situations must be determined after a review of all of the facts and circumstances.

     (a) The placement and operation of a bank or credit union on exempt property. Such an activity is using the exempt property for pecuniary gain and to promote business activities and will cause the loss of exemption. Such an operation provides a service that is not distinguishable from services provided to the general community. The exemption is nullified for the portion of the property occupied by the bank or credit union.

     (b) An antique shop, gift shop, or retail store that sells a variety of merchandise, but does not primarily sell products directed at students, faculty, or staff of the school or college, and occupies an exempt college-owned building on the school or college campus on a regular and continuing basis. Such a store does not provide a specific school or college related program or service, and is being operated for pecuniary gain and to promote business activities. The exemption is nullified for the portion of the building occupied by the business.

     (9) Additional requirements.

     (a) Any school or college, or not-for-profit foundation established for the exclusive support of an institution of higher education, that applies for a property tax exemption under this section must also comply with the provisions of RCW 84.36.805 to the extent applicable. Schools, colleges, and not-for-profit foundations established for the exclusive support of an institution of higher education may, without losing the exemption, loan or rent exempt property to organizations even though the property would not be exempt if owned by such organizations, as long as the rents or donations received for the use of the portion of the property loaned or rented are reasonable and do not exceed the maintenance and operation expenses attributable to the portion of the property loaned or rented. WAC 458-16-165 describes and explains additional conditions and requirements that must be complied with to obtain and maintain a property tax exemption for a school, college, or not-for-profit foundation.

     (b) Any school or college, or not-for-profit foundation established for the exclusive support of an institution of higher education, that applies for a property tax exemption under this section must also comply with the provisions of RCW 84.36.840. In accordance with that statute, the applicant must annually file a report with the department on or before April 1st. The report must be signed, and state that the revenues of the school, college, or foundation, including donations, have been applied to maintenance and operation expenses or capital expenditures of the school or college or foundation and to no other purpose. The report must also contain the following information:

     (i) A list of all property, real and personal, claimed to be exempt, including the parcel number(s) and/or addresses for all real property;

     (ii) The purpose(s) for which the property was used;

     (iii) The revenue derived from the property for the preceding calendar year;

     (iv) The use to which the revenue was applied;

     (v) The number of students who attended the school or college; and

     (vi) The total revenues of the school, college, or foundation, with the source from which they were derived, and the purposes to which the revenues were applied, giving a detailed accounting of the revenues and expenditures.

[Statutory Authority: RCW 84.36.865, 84.36.040 and 84.36.050. 01-24-037, § 458-16-270, filed 11/28/01, effective 12/29/01. Statutory Authority: RCW 84.08.010, 84.08.070 and chapter 84.36 RCW. 94-07-008, § 458-16-270, filed 3/3/94, effective 4/3/94. Statutory Authority: RCW 84.36.865. 85-05-025 (Order PT 85-1), § 458-16-270, filed 2/15/85. Statutory Authority: RCW 84.36.389 and 84.36.865. 83-19-029 (Order PT 83-5), § 458-16-270, filed 9/14/83. Statutory Authority: RCW 84.36.865. 82-22-060 (Order PT 82-8), § 458-16-270, filed 11/2/82; 81-05-017 (Order PT 81-7), § 458-16-270, filed 2/11/81; Order PT 77-2, § 458-16-270, filed 5/23/77; Order PT 76-2, § 458-16-270, filed 4/7/76. Formerly WAC 458-12-230.]

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