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Possessory Interest Tax



Briefly, a possessory interest tax is a property tax levied on private property rights held in publicly-owned property.

The possessory interest tax is one of the oldest property taxes in California, dating back to the early days of the state when virtually all property was publicly owned and thus the only taxes levied had to be possessory interest taxes.

Publicly-owned property (streets, parks, airports, etc.) generally does not appear on the tax rolls.  It is owned by the people and is available for everyone's use and taxing such property would be only a bookkeeping entry as these taxes would be paid with public money into public money treasuries.

However, when such publicly-owned property is diverted to private use the public loses its use of the property and the private user gains approximately the same usage rights to it as they would have if they owned the property.  Thus, there is a "private property right" to the use of the publicly-owned property and this right is taxable, according to the Constitution of the State of California.

Section I, Article XIII, of the Constitution reads (in part):
"All property in the state, except as otherwise in this Constitution provided, not exempt under the laws of the United States, shall be taxed in proportion to its value..."

The effect of this provision is that the tax burden is distributed over the populace in proportion to the property owner.
It can be easily seen that without possessory interest taxes the renters of publicly-owned property would escape their proportionate share of the tax burden.

For example:  Consider the case of a tenant renting a publicly-owned residence as compared to the owner of a similar residence.  In the case of the renter, the landlord must collect rent sufficient to pay the tax burden plus recovery of his expenses, and a reasonable profit.  Thus, this renter does carry his/her share of the tax burden.  The owner living in a similar residence must also pay taxes, and is paying his/her share of the tax burden.  But, the tenant in the publicly-owned residence contributes nothing to the tax burden unless a possessory interest tax is levied.  A similar comparison can be made for businesses, such as restaurants on public wharves.  They would have a definite competitive advantage over other restaurants if they did not have to contribute their proportionate share taxes through the possessory interest tax.
Other examples of possessory interests are:

  • Concessionaire's rights in public parks;
  • Leased berths in public marinas;
  • Leased hangars at public airports;
  • Any residence or other privately used buildings on tax exempt land; etc.

There have been many disputes and court cases on the question of whether or not a possessory interest exists in certain instances and the results of these cases have, over the years, established a fairly firm set of guidelines as to what actually constitutes a taxable possessory interest.  It can, therefore, be assumed when such assessments are made that there is a clear basis for the assessment.

The above discussion is offered in the hope that it will help in understanding the position taken by the California State Board of Equalization in requiring County assessors to assess possessory interests. Anyone interested in further discussion of this tax is invited to contact the Possessory Interest Assessment Division in Room 130D at the County Governmental Building, 701 Ocean Street, Santa Cruz.


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