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The Challenge of the Property Tax Exemption

Posted on Mar. 22, 2021
Roxanne Bland
Roxanne Bland

Roxanne Bland is Tax Notes State’s contributing editor. Before joining Tax Analysts, Bland spent 17 years with the Multistate Tax Commission, where she worked with state revenue agency representatives to draft model legislation pertaining to sales and use taxation and corporate income, analyzed and reported on proposed federal legislative initiatives affecting state taxation, worked with legislative consultants and representatives from other state organizations on international issues affecting states, and assisted member state representatives in federal lobbying efforts. Before that, she was an attorney with the Federation of Tax Administrators for over seven years.

In this installment of The SALT Box, Bland analyzes a case before the Ohio Supreme Court concerning property tax exemptions for nonprofit entities.

For entities performing charitable, educational, religious, or similar work, property tax exemptions are valuable assets. Some tax exemptions are akin to a quid pro quo, such as those for a hospital that treats indigent patients at no charge, or for an organization that provides housing for the homeless, thereby relieving a state of some of the financial burden of providing services to needy residents. Other tax exemptions are religious in nature, such as those for churches. The benefit of a property tax exemption for these entities is that the monies that otherwise would be spent fulfilling their tax obligations can be used to maintain or expand their activities. Yet property tax exemptions are a matter of legislative grace, not entitlement, and can be easily lost if the entity ceases to qualify for the exemption. A nonprofit hospital that severely limits the number of indigent patients it accepts can lose its property tax exemption. Likewise, a church with parking facilities that can be accessed by the general driving public for a fee may forfeit its tax exemption for that portion of its property. However, if an entity can prove that its activities are in support of its mission, even if seemingly unrelated, its exemption will not be revoked.

Challenging an Exemption

In a David-versus-Goliath drama playing out before the Ohio Supreme Court, James O’Keefe challenged Ohio State University’s (OSU’s) property tax exemption on a 325-acre parcel it owns, on which the university operates a general aviation airport — the busiest in the state in 2020, according to the OSU website.1 O’Keefe argues that OSU’s use of the property has materially changed over the course of decades such that it is no longer being used for educational purposes. OSU counters that the airport is an extension of the university’s College of Engineering and supports over 30 aviation degree programs, as well as flight training for students looking to obtain a pilot’s license, certification as a flight instructor, or both.

Facts

The OSU airport property was purchased by the state in 1942. Before that year, OSU’s flight training facilities were located at the Columbus Municipal Hangar (now the John Glenn Columbus International Airport). However, the U.S. Navy took over the airport for its use during World War II, forcing OSU’s program to relocate. A hangar for OSU’s airplanes was constructed on the property, as well as runways and a maintenance facility, and the university’s flight training program resumed in 1943. At this time, the OSU airport was a private facility operated solely for the benefit of the university, and all monies paid by students for tuition were deposited in OSU’s general fund. In the 1960s the Civil Aeronautics Administration (now the FAA) identified OSU’s airport as a prime candidate for a supplemental public-use airport. Grant monies from the federal agency allowed the university to expand the airport’s capacity to accommodate non-university private aircraft. When ready, OSU’s airport was designated by the FAA as a facility open to public use for all types of aircraft except regularly scheduled passenger airliners.

The airport has greatly expanded since the 1960s, adding numerous hangars and tie-down spaces for private and corporate aircraft storage that are leased to individuals and corporations not connected to the university, and constructing new runways to accommodate those aircraft. Other upgrades included an expanded terminal that also houses the airport administration offices and classrooms. Classroom space is marketed to private parties as an event venue. The airport provides all aeronautical and non-aeronautical services to public users. Per FAA guidelines, all income generated by the airport — roughly 85 percent of which is collected from non-university users — must fund the operational expenses of the facility.

O’Keefe argues that there are two statutes at play in this case. First, the property tax exemption statute as it appeared in 1943, under which the OSU airport likely received its exempt status.2 Ohio Rev. Code Ann. section 5709.07 required that the property be used exclusively by the university to retain its exempt status. At the time the exemption was granted, the airport was used exclusively by OSU. The second statute, Ohio Rev. Code Ann. section 5709.12, exempts only property that is actually used by an educational institution, and does not extend to property not used by the institution or property leased to private parties. However, the airport argues that it is a third statute — Ohio Rev. Code Ann. section 3345.17 — that is applicable in this case, which provides that all property owned by a state university or by the state for the use, benefit, or support of the university is exempt from tax so long as the property is used for that purpose. O’Keefe disagrees, contending that section 3345.17 is not implicated because the statute was enacted in 1964, and the airport was granted exempt status in 1943. O’Keefe relies on a bulletin issued by the tax commissioner to county auditors when determining whether an exempt property should be restored to the tax rolls under a complaint, which requires that the auditor conduct legal and factual research to confirm that the property is used in the manner required by the original exemption. O’Keefe interprets this as section 5349, the statute under which he contends the airport originally received its exempt status.3

OSU insists that the airport, which it characterizes as an extension of OSU’s College of Engineering, is the university. Even if it is not, OSU argues, the airport supports the university by providing a holistic learning environment in aviation and aviation-related programs, affording students classroom and practical experience simultaneously. As an FAA-regulated general aviation airport, it is required to serve the public, and by doing so it offers students in select programs, such as airport management, a full hands-on experience in running an air facility as employees paid by the university. Airport management, OSU says, involves the totality of airport operations, including food services and rental cars. Although OSU acknowledges that the airport received its property tax exemption in 1943, the supporting documentation for that exemption has been lost. Thus, OSU argues, it can only be assumed that the exemption was granted under a statute similar to section 3345.17 (enacted in 1964), under which the airport’s exemption was reaffirmed. OSU further notes that state supreme court precedent, in cases questioning the airport’s property tax exemption when the property involved was leased to private parties and used for purposes unrelated to airport operations, held these uses secondary to the university’s academic purpose, and thus did not remove the exemption because under section 3345.17, an exemption does not turn on “exclusive use.” As for O’Keefe’s claim that the airport property’s use has substantially changed in the decades since the exemption was granted, OSU countered that the state supreme court in Columbus City School District4 (which, ironically, O’Keefe also points to in support of his argument) had stated that “an ancillary use of property that generates income does not defeat the exemption as long as the property is used, to some degree, either currently or prospectively, in a way that operationally relates to the university’s activities.” The supreme court went on to say, “The use of the income to support university activities, whenever there is any such income, is probably a necessary condition for exemption.”

What’s Going on Here?

This case boils down to which statute(s) the OSU airport property’s entitlement to a continuing exemption should be judged under — sections 5709.7 and 5709.12, two narrow statutes under which the airport’s activities would clearly cause it to lose its property tax exemption; or section 3345.17, a statute whose language is broad enough to encompass the airport’s activities, in which case the exemption stands. It is interesting to note that both parties rely on the same precedent, Columbus City School District, to bolster their arguments. If O’Keefe is correct that the exemption turns on whether the airport today is being used in the manner for which the exemption was originally granted in 1943 (i.e., flight instruction only), the airport’s activities — namely, leasing space to private parties not connected with the university and from which it derives the bulk of its income for operational expenses — do not qualify as an ancillary use of the property. Under O’Keefe’s interpretation, the bulk of the airport’s property is not operating as part of the university, and the mere fact that OSU owns the property does not support a continuing exemption. If OSU is correct that the airport qualifies as a part of the university, the property’s use is surely operationally related to the university’s activities. Further, the state supreme court’s observation that the income generated is “probably a necessary condition for the exemption” can be interpreted in two ways. The word “probably,” as used in this phrase, could mean “most likely a necessary condition,” or it could mean “may or may not be a necessary condition.” If “most likely” is correct, the income generated by the airport’s activities would defeat the exemption because none of it is operationally related to the university. If “may or may not” is correct and the income is solely used to maintain the airport as required by the FAA, the exemption stands because to retain it, the airport isn’t required to financially contribute to the university’s general fund. In any event, unfortunately for O’Keefe, his argument is likely destined to fail. In matters of statutory construction, if two statutes conflict, as they do in this case, the newer statute will prevail. Section 3345.17 was adopted in 1964, and section 5349 (now section 5709.7) was in effect at the time the airport’s exemption was granted in 1943. Although it is also a rule of statutory construction that “the specific controls over the general,” even if the 1943 statute should take precedence because of its specificity requiring that the property be used exclusively by an educational institution, the general statute was enacted later in time, and without reviewing the legislative history, it is more likely than not that the Ohio legislature intended the broader section 3345.17 to apply.

Conclusion

Property tax exemptions are valuable assets to nonprofit entities because the monies they would have paid to the local government can be used to maintain or expand the entities’ activity. However, if an entity strays beyond the boundaries that qualify it as exempt, that benefit can be lost. If the entity can show that its activities are part of its mission, even if to some they appear not to be, the exemption can be retained. Unfortunately, though O’Keefe’s claim, standing by itself, may have some merit, the rules of statutory construction, which are applicable to every court, could mean the outcome will not be in his favor.

FOOTNOTES

1 O’Keefe v. McClain, No. 2020-0134 (Ohio S. Ct. 2020). See alsoMonumental Year for Ohio State Airport: KOSU Led Ohio With Highest Count of Takeoffs and Landings in 2020,” The Ohio State University Airport (last visited Mar. 3, 2021).

2 Ohio G.C. section 5349 was renumbered as Ohio Rev. Code Ann. section 5709.07 in 1953. Records documenting the grant of OSU’s property tax exemption were apparently lost, so there is no factual evidence that the airport was granted its exemption under this statute.

3 County Audit Bulletin 25.

END FOOTNOTES

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