The answer differs from state to state depending on whether that state has a statute that allows for taxation of leaseholds and/or taxation of property used for the operation of an airport. This article will discuss the many considerations that go into determining whether your airport leasehold is taxable, what happens if you agree to pay taxes and find out the property is not taxable, and what happens if the local municipality suddenly decides that the property is taxable and begins levying taxes against the tenant.
Determining Whether Taxes Can be Levied Against an Airport Tenant
Whether a leasehold interest on airport property is taxable is generally a question of state law that involves several layers of inquiry including (1) whether airport property is exempt; (2) whether a tenant leasing the property for a commercial purpose can avail itself of the exemption; and (3) whether leasehold interests are taxable. Generally, a municipality only has the taxing authority allowed to it by the state’s legislature. If the state legislature does not provide for the taxation of a particular property, it is likely not taxable.
The first question is whether the airport property is tax exempt under state law. Many states have statutes that exempt airport property either entirely or in certain circumstances. For example, Kansas exempts all property owned and operated as an airport by a political subdivision. See Kansas Statutes §79-201q. Some states, like Connecticut, only exempt airport property that is owned by one municipality but located in another municipality. See Connecticut General Statutes §12-74. In some states, like Pennsylvania, the legislature has exempted property that is used for a “public purpose” which include operating an airport. See e.g. PA Const. Art. 8 §2.
Assuming there is an exemption that precludes the airport from being taxed, can a tenant of the airport avail itself of the exemption? In order to determine this, one must first look to the language of the statute that provides the exemption. In order to avail itself of the exemption, the tenant must fit squarely within the statute. Many of the state statutes which make airport property tax exempt require that it be used for a “public purpose.” Is a tenant who leases airport property in order to provide aviation services to the general aviation community using the leased airport property for a public purpose? It depends on the jurisdiction, facts and circumstances. An analysis of what constitutes a “public purpose” requires a review of the legislative history and case law interpreting same.
Once you determine what constitutes a “public purpose” you need to evaluate the facts and circumstances of the particular situation to determine whether the property is being used for a public purpose. Factors to be considered include the following: (1) Does the tenant intend to provide services to the general public; (2) Are the services the tenant provides essential operations of an airport? (3) Will the rents charged advance the airport’s interest in becoming as self-sustaining as possible? A credible argument can be made that a tenant who intends to provide fueling or maintenance to the aviation community is using the premises for a public purpose because the services are essential to the operation of an airport and the airport is collecting rent for the premises which is used to defray the costs of maintaining an airport.
Assuming that the airport property is not exempt from taxation and/or the tenant cannot avail itself of the exemption, the last area of inquiry is whether the jurisdiction allows for taxes to be levied against a leasehold interest. A state statute rendering leasehold interests exempt from taxation would clearly answer that question. In many jurisdictions, however, there is no statute providing that leasehold interests are not taxable. Instead, in many jurisdictions, a municipality lacks the authority to levy taxes unless specifically provided for by statute. In those jurisdictions, it is the absence of a statute providing for the taxation of a leasehold interest that renders the leasehold interest not taxable.
What Happens When a Lease Obligates a Tenant to Pay Taxes and the Tenant Subsequently Determines the Property and/or Leasehold are Not Taxable?
Many airport leases contain language that provides “The Tenant shall be solely responsible for any real and/or personal property taxes, charges, and assessments levied by any governmental entity against it for the use of the Leased Premises.” Before entering into a lease, prospective tenants should be mindful of whether the leasehold interest in the property is taxable. Prospective tenants and their counsel should do due diligence relating to taxes before executing a lease. The due diligence should include (1)requests for information from the airport/landlord; and (2)a search of the tax rolls of the municipality with the taxing authority over the airport to determine what, if any, taxes have previously been levied against the property being leased as well as the airport property generally.
What happens if you sign the lease and determine that the property is not taxable? It depends on the language of your lease and the facts and circumstances presented. In order to avoid paying the taxes levied, you may have to assert a tax appeal or other legal challenge to the municipality’s taxing authority. Litigating a tax appeal or other legal challenge to the municipality’s taxing authority could be costly and time consuming. Therefore, before you embark upon a legal challenge you should make sure you exhausted all avenues for resolution. Efforts at resolution should include, discussing with your landlord and asking for their thoughts on the situation. If they view your situation favorably, they may have some ideas for how to approach the taxing authority in an attempt to get them to view your position more favorably. If it cannot be resolved, determine what the budget is for a legal challenge. You don’t want to spend more money litigating then you would spend in taxes through the conclusion of your lease.
What Happens When the Taxing Authority Changes Its Position on Whether Your Property is Taxable Mid-Lease?
This issue recently made headlines when the Hillsborough County Property Appraiser refused to provide exemptions for fifteen (15) leaseholds at Tampa International Airport, Tampa Executive Airport and Peter O. Knight Airport. The Hillsborough County Aviation Authority had previously filed for and received exemptions for those properties. As a result of the Property Appraiser’s changed position, Hillsborough County Aviation Authority challenged the Property Appraiser’s refusal to provide the exemptions. In November 2020, a Circuit Judge ruled in favor of the Hillsborough County Property Appraiser but the Hillsborough County Aviation Authority, recognizing the economic impact on the Airport vowed to appeal.
It is important to note that not all airport landlords are willing to wage years of litigation aimed at overturning a taxing authority’s determination like Hillsborough County Aviation Authority. Therefore, when a tenant finds itself in the position of suddenly being taxed for its leasehold interest in airport property that had previously been exempt, it is important for the tenant to review their lease and verify that they are responsible for paying the taxes. Whether the tenant agreed to pay taxes on the leasehold interest will likely impact whether the landlord will aide in a challenge of the assessment. Thereafter, the tenant should immediately begin a dialogue with the landlord and discuss the economic implications not only to the tenant but to the airport community as a whole. The tenant should urge the landlord to intervene on their behalf either formally or informally. Even if the landlord is not willing to undertake a legal challenge, they may be willing to engage the taxing authority in a dialogue. If the landlord is unwilling to assist either formally or informally in challenging the assessment, the tenant may be able to negotiate a remedy with the landlord that accounts for the tenant’s changed circumstances of having to pay the newly assessed taxes.
While this article provides some useful information relating to how to determine whether a leasehold interest in an airport is taxable and what to do if the leasehold interest is being taxed unlawfully, it is important for prospective tenants to engage in the due diligence efforts discussed herein and to consult with counsel in an effort to prevent being surprised. Notwithstanding having taken all reasonable efforts to avoid a surprise assessment, as we saw in the Hillsborough County case, a change of position of a taxing authority could blindside a tenant. Knowing and understanding remedies will leave the tenant better prepared in the event that they do receive a surprise assessment.
Alison L. Squiccimarro is an attorney with the Law Offices of Paul A. Lange, LLC with offices in New York and Connecticut. Alison’s nationwide practice focuses on aviation related commercial litigation with an emphasis on FAA and DOT Regulatory Issues, Airports, Insurance Coverage and Employment matters. Additionally, Alison co-chair’s the American Bar Association, Forum on Air & Space Law’s Airports Committee.
