Tax Exemptions for Colleges and Universities

• Statutory Language
• Proportional Exemptions
• Conclusion

Tax exemptions often refer to exclusions from responsibility for paying property taxes on buildings and grounds owned or used by colleges and universities. Insofar as both public and private postsecondary institutions provide an important state function, state laws usually grant them tax exemptions for property that they own or use. A threshold question in this regard considers the conditions under which state statutes grant exemptions to institutions of higher learning. A secondary inquiry examines the nature of the property interests held by postsecondary institutions. In light of the various legal issues surrounding the issue for colleges and universities, this entry examines the dimensions of tax exemptions in the world of higher education.

Statutory Language

In order to determine which properties are entitled to tax-exempt status, courts usually begin with examinations of the language of state statutes on the subject. A brief survey of tax-exemption statutes reveals that such laws typically grant exemptions for ownership, for having control over, for uses, for uses with exceptions, for ownership or use, or for ownership and use. Even so, as reflected in the following illustrative cases, the judiciary can interpret tax exemptions expansively or narrowly.
Alabama’s statutory exemption is more narrowly stated than most, allowing exemptions only for property that is used “exclusively for religious worship, for schools or for purposes purely charitable.” After an industrial development board built a hotel and conference center on universityowned land, the board leased the facility to the hotel, which was part of a limited partnership. The hotel company then subleased the conference center back to the university but contracted with a hotel management firm for its operation. On further review of the denial of the partnership’s request for a tax exemption, an appellate court affirmed that it was not entitled to the relief it sought (AU Hotel, Ltd. v. Eagerton, 1996). The court explained that insofar as the hotel provided lodging for the general public, it was not reserved for an exclusive educational use within the meaning of the state tax code.
Where Georgia’s tax exemption statute allows exemptions for any “seminary of learning,” a challenge to an apprenticeship program in pipefitting and plumbing prompted the question of whether a trade school was a “seminary of learning.” An appellate court ruled that because the term “seminary of learning” had historically been used to describe any educational enterprise, the trade school program qualified for the tax exemption (J.A.T.T. Title Holding Corp. v. Roberts, 1988).
At issue in a dispute from Kansas was the meaning of an exemption for property that is for “educational use.” Litigation ensued when the National Collegiate Athletic Association (NCAA) created a corporation to manage the property where it located its headquarters. On further review of the reversal of the tax appeals board’s denial of the NCAA’s property tax-exempt status on the basis that the headquarters did not qualify as an “educational use,” the state’s highest court affirmed in favor of the NCAA (National Collegiate Realty v. Board of County Commissioners, 1984). The court applied a broad interpretation of the words “educational use” in upholding the exemption insofar as it acknowledged the NCAA’s role in assuring amateurism in intercollegiate sports.
The Pennsylvania Constitution grants a tax exemption for property “used for the purposes of the institution,” while a commonwealth statute extends the exemption to property “necessary for the occupancy and enjoyment of the university.” When a college rented eight of approximately 50 houses it owned to central service staff at a reduced rate, officials successfully challenged the county taxation board’s denial of the institution’s tax-exempt status on the eight houses. The record revealed that the staff members who occupied the houses were on call around the clock for maintenance and security work. An appellate court affirmed that renting houses to staff members to answer emergency calls, even when such incidents occurred only a few times each year, was for institutional purposes that made the rental of such houses necessary, and that the university was therefore entitled to the exemption (In re Swarthmore College, 1994).
Tennessee provides a tax exemption for property that is owned, operated, or controlled by the state. Consequently, when a university leased five parcels for various commercial purposes, including hotels, apartments, and a service station, the state’s highest court upheld the exemption in the face of what had been a possible assessment by a county tax assessor (Lamanna v. University of Tennessee, 1971). The court affirmed that the exemption was acceptable, because it was within the ambit of the statute that required the income derived from the leases to be applied to public uses.
Two cases on a similar issue reached different outcomes. The property tax code of Texas grants an exemption for property “used exclusively for educational functions” and “reasonably necessary for the operation of the school.” In light of this provision, a tax dispute arose over an exemption for a college president’s residence. In finding that the private residential use of a building met neither the standard of exclusivity nor that of necessity, an appellate court denied the request for tax-exempt status (Bexar Appraisal District v. Incarnate Word College, 1992).
On the other hand, the Supreme Court of Iowa upheld a request for tax-exempt status for the house of a university’s vice president of ministry (St. Ambrose University v. Board of Review for City of Davenport, 1993). The court interpreted the broad tax exemption in state law for “all grounds and buildings used or under construction by literary, scientific, charitable, benevolent, agricultural, and religious institutions and societies” as allowing the vice president’s university-owned residence to qualify for the exemption.
In light of Wisconsin’s tax exemption for property “owned and used exclusively by . . . educational or benevolent associations,” town officials contested an order granting a tax exemption for lakeside property owned by a university. The university sought the exemption, because it provided a physical education course on the property early in the summer but leased it to the alumni association for use as a summer camp for the remainder of the summer. Affirming in favor of the university, an appellate court noted the educational use of the physical education course and the integration of the alumni association with the operations of the university. The court thus agreed that the property qualified for the tax exemption, even though the university was in another state (Trustees of Indiana University v. Town of Rhine, 1992).
Types of Property Interest The nature of the property interests of postsecondary institutions is another aspect that can determine their tax-exempt status. The nature of an institution’s interest is important, because a variety of situations can occur, in terms of contractual arrangements necessary to secure building uses, of creative financial arrangements necessary for constructing or maintaining buildings, or of changes in the management and control of buildings over time.
A case from Connecticut illustrates the nature of a university’s property interest in a dispute over a tax exemption in University of Hartford v. City of Hartford (1984). A university leased an apartment building and used it primarily for student housing. More specifically, about two-thirds of the apartments were rented to students, while the remaining units were rented to the elderly and persons with disabilities. In declining to consider whether the usages were educational for the purposes of gaining tax-exempt status, an appellate court affirmed that the university’s leasehold was not the type of interest in the property that qualified for tax-exempt status.
The fact that Illinois grants of tax exemptions for state-owned property made the nature of a university’s property interest central in one dispute. Where a university foundation owned a building that was used for a conference center, an appellate court acknowledged the close relationship between the university and the foundation. However, the grantor of the property attached covenants and restrictions on the use of the property, with the possibility of a reversion to the grantor if the terms were not observed. The court was of the opinion that this type of property interest, wherein the grantor controlled so much authority and the property was not used primarily for educational purposes, meant that the conference center was not entitled to tax-exempt status (Northern Illinois Foundation v. Sweet, 1992).
Creative financial arrangements were at the center of a tax exemption dispute in New York, where a college corporation that operated two colleges on one campus leased land to a developer for 40 years. The college then joined in a master lease with the developer to build a dormitory on the land. During the term of the master lease, the college controlled rental levels and selected students who could live in the dormitory. At the end of the lease, ownership reverted to the college. As reflected in state law, retaining tax exemptions in lease agreements requires colleges to show that they had the incidents, or outward appearance, of ownership in the property. College officials argued successfully that the institution had all of the same incidents of ownership, because the board financed the dormitory with a mortgage. An appellate court affirmed that because the college was the owner of the dormitories for tax purposes, it was entitled to the tax exemption (Colleges of Seneca v. City of Geneva, 2000).

Proportional Exemptions

Proportional exemptions occur when universityowned properties have mixed uses. Commonly, exemption disputes concern whether property is fully or partially tax exempt, proportional to the amount of use that is educational. The application of proportional exemptions, like that of full exemptions, depends on the interpretation of state law.
In the first of two cases from Ohio, a mixed-use property tax dispute arose when a university created a business incubator program. The office of the incubator program was located in a university office building that included an adjacent parking garage. The tenants in the building included three nonprofit corporations and two for-profit corporations; two of the three nonprofit corporations were directly affiliated with the university. In affirming a grant of partial tax-exempt status, an appellate court ruled that the space occupied by the two university-affiliated corporations was entitled to such relief (Case Western Reserve University v. Tracy, 1999). The court denied the request for the remainder of the building and the parking garage, because these spaces were used by for-profit corporations.
Insofar as Ohio law grants tax-exemption status when property is “used for the support of such [an] institution,” it creates a broader exemption than usual. Where the state held title to a building on behalf of a university, its school of architecture took up 88% of the space with the remaining 12% leased for commercial use as a laundry and convenience store. Because it was satisfied that the rent from the commercial uses went into the university’s general fund, the state’s highest court affirmed that all of the building qualified for the tax exemption (State for Use of University of Cincinnati v. Limbach, 1990).

Conclusion

The law related to tax exemptions parallels the observed authority relationships between postsecondary institutions and local communities in zoning regulations, wherein the language of exemption statutes can be narrow or broad. As state-level financial support for colleges and universities continues to decline, postsecondary administrators will likely continue to seek more creative arrangements for contracting, maintaining, and operating institutional buildings. To this end, administrators will need to take care in their creativity not to compromise their facilities’ status under state tax-exemption laws that have granted them significant benefits in the past.

Further Readings
Dagley, D. L. (2005). Town and gown issues. In J. Beckham & D. Dagley (Eds.), Contemporary issues in higher education law (pp. 449–478). Dayton, OH: Education Law Association.
Legal Citations
AU Hotel, Ltd. v. Eagerton, 689 So. 2d 859 (Ala. Civ. App. 1996).
Bexar Appraisal District v. Incarnate Word College, 824 S.W.2d 295 (Tex. App. 1992).
Case Western Reserve University v. Tracy, 703 N.E.2d 1240 (Ohio 1999).
Colleges of Seneca v. City of Geneva, 709 N.Y.S.2d 493 (N.Y. App. Div. 2000).
In re Swarthmore College, 645 A.2d 470 (Pa. Commw. Ct. 1994).
J.A.T.T. Title Holding Corp. v. Roberts, 371 S.E.2d 861 (Ga. 1988).
Lamanna v. University of Tennessee, 462 S.W.2d 877 (Tenn. 1971).
National Collegiate Realty v. Board of County Commissioners, 690 P.2d 1366 (Kan. 1984).
Northern Illinois Foundation v. Sweet, 603 N.E.2d 84 (Ill. App. Ct. 1992).
St. Ambrose University v. Board of Review for City of Davenport, 503 N.W.2d 406 (Iowa 1993).
State for Use of University of Cincinnati v. Limbach, 553 N.E.2d 1056 (Ohio 1990).
Trustees of Indiana University v. Town of Rhine, 488 N.W.2d 128 (Wis. Ct. App. 1992).
University of Hartford v. City of Hartford, 477 A.2d 1023 (Conn. Ct. App. 1984).