October 17, 1988
Mr. Timothy H. Amdahl
Commissioner
School and Public Lands
State Capitol
Pierre, South Dakota 57501
OFFICIAL OPINION NO. 88-43
Taxation of Leasehold Interests on School and Public Lands Leases
Dear Commissioner Amdahl:
You have requested an official opinion from this Office in regard to the following factual situation:
FACTS:
Pursuant to the constitutional and statutory requirements of your office you regularly enter into leases involving school and public lands. In 1977 the Legislature passed what is now SDCL 10-6-31.2 which separately classifies for the purposes of taxation leasehold interests upon school and endowment lands. According to your figures for the year 1987 surface lease income from school land leases was $1,687,753.62 and county levied taxes for that year amounted to over $700,000.00. In 1981 the Legislature passed what is now SDCL 5-11-1.1 which provides for the forfeiture of leases held by individuals who failed to pay taxes levied against their school and public lands leasehold interests.
Based on the above facts you have asked the following questions:
QUESTIONS:
1. Is the taxation by local governments of the leasehold interest of leases covering school and endowment lands pursuant to SDCL 10-6-31.2 unconstitutional?
2. Are the forfeiture provisions of SDCL 5-11-1.1 unconstitutional?
3. If taxes levied by counties on school and public lands leases are illegal can counties be held liable for the repayment of these taxes?
IN RE QUESTION NO. 1:
Discussion:
The question of the taxation of property leased by a governmental entity has been the subject of two relatively recent South Dakota Supreme Court cases. In 1978 the South Dakota Supreme Court decided the case of Appeal of Black Hills Industrial Freeport Inc., 268 N.W.2d 489 (S.D. 1978). In that case the City of Edgemont entered into what was termed a "lease with option to purchase" with Black Hills Industrial Freeport Incorporated. When the county began taxing the leased property, Black Hills Industrial Freeport applied for the abatement of certain real property taxes. The request for abatement was denied at both the county commission and circuit court level and an appeal was taken to the Supreme Court. Black Hills Industrial Freeport contended that they were exempt from the real property taxes upon the land in question because title to the land was held by a tax exempt entity, the City of Edgemont. Freeport's position was that pursuant to Article XI, § 5 of the South Dakota Constitution, this land could not be taxed. The Supreme Court agreed with the position taken by Freeport and ordered the property taxes in question to be abated.
After determining that the City of Edgemont was the equitable owner of the property subject only to the leasehold interest and option to purchase of Freeport, the Court went on to apply the provisions of Article XI, § 5 of the South Dakota Constitution, which reads in relevant part: "The property of the United States and of the state, county and municipal corporations both real and personal shall be exempt from taxes. . . ." The Court ruled:
This constitutional provision is self-executing and has force and effect without enabling legislation. Egan Consolidated School District v. Minnehaha County, 1936, 65 S.D. 32, 270 N.W. 527.
In past cases, involving the question of whether municipal property should be taxed, this court has unequivocally held that the use of property has no relevance.
The provisions of the Constitution are without limitation or condition. The location of public property or its use is not made a condition of exemption and the provisions apply alike and with the same effect to the United States, the state (except rural credit lands), counties and municipal corporations. . . The unqualified exemption embraces all property of municipal corporations within the state irrespective of use. (Emphasis added.) City of Yankton v. Madison, 1945, 70 S.D. 627, 630, 20 N.W.2d 371, 372. Freeport 268 N.W.2d at 492.
On June 8, 1983, the South Dakota Supreme Court released its decision in the case entitled In the Matter of the Petitioner of CM Corporation for Tax Abatement, 334 N.W.2d 675 (S.D. 1983). In CM Corporation, the Supreme Court of South Dakota once again held that property which is subject to a leasehold interest is exempt from taxation under the South Dakota Constitution. Once again discussing Article XI, § 5 of the South Dakota Constitution, the Court held on page 677 that "constitutional exemption is self-executing and dependent upon no other condition than ownership." CM Corporation, 334 N.W.2d at 676. The Court further stated:
In Freeport, we held that the tenant held only a leasehold interest and that the property was not subject to tax because it was owned by a municipality.
CM Corporation, 334 N.W.2d at 676. In further explaining the Court's reasoning in the Freeport case as applied to CM Corporation, the Court explained:
Freeport held that even if there is a provision in the agreement for payment in lieu of taxes, if a municipality is the owner of property then no tax can legally be assessed against it. Under the stipulation of facts and our Freeport decision, the City of Custer is the owner of the nursing home property. This property is therefore not subject to tax. Accordingly, there is no tax to pay and nothing provided in lieu of taxes.
CM Corporation, 334 N.W.2d at 677. Neither of these cases deal with the specific question of the legality of taxing a leasehold interest on tax exempt land. In 1977 the United States Supreme Court, in the case of United States, et al. v. County of Fresno, et al., 429 U.S. 452 (1977) held that irrespective of the federal government's immunity from state taxation, states may tax federal employees' possessory interest in housing owned and supplied to them by the federal government as part of their compensation. The Court held the tax legal provided the legal incidence of the tax falls on the employees, not the federal government, and the tax does not discriminate against the employees or the government.
Article II, § 2 of the South Dakota Constitution allows the Legislature to separately classify property for tax purposes. SDCL 10-6-31.2 establishes as a separate class of property leasehold interests upon school and endowment lands. Provided that (1) the taxes in question are only based on the value of the leasehold interest and not the land itself, (2) the legal incidence of the tax falls only on the lessees, and (3) the tax does not discriminate against the lessees or the state then there is nothing in South Dakota's statutory or case law which would make SDCL 10-6-31.2 unconstitutional.
The answer to Question No. 1 then is that under certain circumstances the leasehold interest in school and endowment leases can be taxed.
IN RE QUESTION NO. 2:
SDCL 5-11-1.1 provides for forfeiture of leases for failure to pay taxes levied upon leasehold interests. Said taxes being legal, SDCL 5-11-1.1 can be used to terminate leases when taxes on leasehold interests are not paid.
IN RE QUESTION NO. 3:
Property tax abatement and refund procedures are discussed at SDCL 10-18-1, et seq. SDCL 10-18-1 states that the six instances noted in that statute are, unless otherwise expressly provided, the only cases in which the board of county commissioners may abate or refund tax payments. If the taxes in question are based on the value of the leasehold interest then there is no tax abatement or refund in order. If the tax in question is based on the value of the land and not the leasehold interest, the land being of more value, then the case becomes one of either over assessed valuation or of property valuation exceeding the value of the property. In either case the county commissioners are without power to either abate or refund the taxes paid and relief, if any is available, can be obtained only through the courts. (See also 1927-28 AGR 285; 1935-36 AGR 502; 1943-44 AGR 147; 1947-48 AGR 39; 1955-56 AGR 201; 1965-66 AGR 31.)
Respectfully submitted,
Roger A. Tellinghuisen
Attorney General
