Opinion ID: 2376336
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Heading Rank: 4

Heading: Exemption Extended to Lessees

Text: Although we have noted that state-owned property is exempt from municipal taxation even in the hands of a lessee, if it has been leased for purposes necessary to the operation of an airport, § 44-4-4.1(5), it could be argued that because the airlines are not the direct lessees of the state, their tax status is unclear. Even though the airlines contended that, given their status as lessees of exempt property, they also are exempt from any tax on improvements, RIAC's exemption under §§ 42-64-7.1 and 42-64-20 does not expressly extend to lessees. [4] Therefore, we address the issue arguably left open by the statutory scheme, namely, whether lessees of tax-exempt airport property are likewise exempt from municipal taxation on that property. The parties cited numerous cases from other jurisdictions addressing the tax status of lessees, but the analyses contained therein rely on the specific language in the laws of the respective states. As such, they are not applicable to this case, in which we adhere to our well-established precedent that [e]xemption from taxation is to be determined not by the policy or the laws of other states but by the constitution and laws of this state. Woonsocket Hospital v. Quinn, 54 R.I. 424, 428, 173 A. 550, 552 (1934). Although this Court has not had occasion to address a lessee's tax status under the exemptions set forth in these statutes, we have held previously that tax-exempt property, by its nature, is not ratable, assessable, or liable to taxation, and therefore that a lessee of tax-exempt property was not bound by the procedural requirements for ratable property under § 44-5-27. St. Clare Home v. Donnelly, 117 R.I. 464, 468-69, 368 A.2d 1214, 1217 (1977). Thus, we attributed the tax-exempt status of the property to the lessee, albeit for a limited purpose. In Fleet Credit Corp., 726 A.2d at 456, we held that computers owned by a nonexempt corporation were not exempt by virtue of their use and possession by a tax-exempt lessee. Hence, the owner's tax status controlled the taxability of the property. Similarly, in Roger Williams General Hospital v. Littler, 566 A.2d 948, 950 (R.I.1989), welooked to formal title to the property at issue to determine whether the property was tax-exempt, and, accordingly, we held that privately owned property leased to a tax-exempt lessee was not exempt. Addressing fact patterns more analogous to the situation at hand, in Woonsocket Hospital v. Lagace, 113 R.I. 95, 99-101, 318 A.2d 472, 475-76 (1974); Quinn, 54 R.I. at 430, 173 A. at 552; and Rhode Island Hospital v. City of Providence, 693 A.2d 1040, 1041 (R.I.1997) (mem.), this Court held that hospital-owned property was exempt from municipal taxation, even while used for commercial purposes by nonexempt lessees, as long as the income derived from the subject property was devoted to hospital use, as the hospital charters required. Similarly, in Preservation Society, 104 R.I. at 564-65, 247 A.2d at 434, we held that property leased for commercial purposes was exempt from taxation on the basis of its ownership by a tax-exempt organization. Adhering to the principles set forth in these decisions, we conclude in this case that the tax-exempt status of leased property is governed by the status of its owner. Therefore, property owned by a tax-exempt entity is exempt even when the property is in the possession of a nonexempt lessee. Accordingly, we hold that the airlines are not liable for municipal taxes from which the lessor that owns the property is exempt, regardless of whether the owner is RIAC or the state. The airlines argued that, under § 44-4-6, tenants for a term of ten or more years are liable for taxes only when they assume such obligations in the lease. The assessor, on the other hand, argued that although § 44-4-6 stands for the proposition that a tenant may assume taxes by the terms of its lease, the statute does not require that a tenant may never be taxed if the tenant does not undertake the obligation. The tax assessor referred to the common law rule that long-term lessees, as against remaindermen, are liable for property taxes to the extent the leased property is income-producing. Koszela v. Wilcox, 538 A.2d 150, 151 (R.I.1988) (reaffirming the holding in Sheffield that aremainderman rather than a tenant is liable for the taxes on unproductive land, notwithstanding § 44-4-6); Sheffield v. Cooke, 39 R.I. 217, 243, 98 A. 161, 170 (1916) (noting that, as between a life tenant or a tenant for years and a remainderman, the tax burden is allocated to the tenant for the duration of the tenancy, to the extent the property is income-producing; conversely, to the extent the property is not income-producing, it is taxable to the remainderman). In our opinion, § 44-4-6 and the cases cited by the assessor are not instructive on the issue before us because the seventeen-year lease to the airlines did not extinguish the property's exempt status and did not produce a taxable event. The statutory and common law rules regarding the allocation of the tax burden between a life tenant and a remainderman do not constitute a source of taxing authority, and, in fact, are not relevant if the property is exempt from taxation in the first instance. Accordingly, the lessee airlines are not liable for taxes on leased property when its lessor, whether RIAC or the state, is statutorily exempt.