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Jul
23

Commercial Use Can Trigger Tax on Tax-Exempt Property

Utah property owners should be aware of tax laws that may even apply to tax-exempt properties.

When a business owner leases property that is exempt from property tax and then uses that property in connection with a for profit business, local taxing entities may have authority to tax the property's user. Whether and to what extent that tax applies will vary by state, but in some states, including Utah, the property user's tax burden can be significant.

Under Utah law, the assessing authority may impose a privilege tax in "the same amount that the ad valorem property tax would be if the possessor or user were the owner of the property," according to the state's tax code. But because Utah's privilege tax is an all-or-nothing tax, local authorities cannot impose the tax unless the user has exclusive possession of the exempt property.

In 2012, the Utah Supreme Court had its first opportunity to determine what constitutes exclusive possession. In Alliant Techsystems Inc. vs. Salt Lake County Board of Equalization, the court identified a three-part test for determining exclusive possession and then remanded the case back to the district court to apply the test.

In April of this year, the Utah Court of Appeals upheld the district court's decision that the user of the exempt property did not have exclusive possession and could not be assessed a privilege tax for its for-profit use of that property. Details of the case, then, may provide important insight for companies in similar circumstances.

Control Issues

Alliant Techsystems Inc., the taxpayer in these appeals, is a for-profit aerospace and defense products corporation that operates on its own property, as well as on the Naval Industrial Reserve Ordnance Plant, a property owned by the U.S. Navy. Alliant and the Navy entered into a facilities-use agreement that governs the company's use of the ordnance plant. In 2000 and for all subsequent years, Salt Lake County imposed a privilege tax on Alliant for its use of the ordnance plant. The county based the amount of the tax on the full value of the exempt property.

Alliant challenged the county's assessment of the privilege tax on the basis that it did not have exclusive possession of the property due to the control retained by the Navy. The Salt Lake County Board of Equalization, the Utah State Tax Commission and then the district court concluded that Alliant had exclusive possession of the ordnance plant because no other party had an agreement with the Navy to use the property. ·

Alliant appealed to the Utah Supreme Court, which interpreted exclusive possession to mean exclusive as against all parties, including the property owner.

Utah's Test

The Utah Supreme Court's three-part test for exclusive possession requires that the user or possessor have (1) the general power to admit or exclude others, including the property owner, from any present occupation of the property; (2) the authority to make broad use of the property, with only narrow exceptions; and (3) possession and control of a definite space for a definite time.

Alliant relied on several points to demonstrate that it lacked exclusive possession of the Navy's ordnance plant, due to the control retained by the Navy:  For one, the Navy had erected a fence surrounding the property, and posted signs stating that the property belonged to the United States government. Additionally, the parties' operating agreement stated that unauthorized use of the property could result in fines, imprisonment or both.

Alliant also pointed out that the facilities-use agreement permitted the Navy to terminate Alliant's right to use the property at any time and for any reason, and at any time to change or terminate the list of facilities that the company may use. The Navy maintained onsite representatives to manage some of the ordnance plant's operations.

Finally, Alliant lacked authority to exclude the Navy or anyone authorized by the Navy from the property; neither could the company use the property for non-Navy purposes without permission from the Navy.

The county didn't dispute these points, and the district court held that Alliant lacked exclusive possession of the ordnance plant property and was exempt from the privilege tax. The county appealed the decision and the Utah Court of Appeals upheld the district court's decision.

Whether a state can tax the business use of exempt property by a lessor will depend on how each state's tax laws are written. If the tax is based on the full value of the property, and the lessor can demonstrate that the property owner maintains control of the property, the user may challenge the tax as violating the Supremacy Clause of the U.S. Constitution, which establishes the supremacy of federal law (and federally established tax exemptions) over state and local laws. Alliant raised that challenge in its appeals, put the court declined to address the constitutional challenge because its interpretation of the statute fully resolved the matter.

Stephen Young Sept 2014Stephen P. Young is a partner in the law firm of Holland & Hart, the Montana, New Mexico, Utah and Wyoming member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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