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AGO 1977 No. 8 - March 03, 1977
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Slade Gorton | 1969-1980 | Attorney General of Washington

TAXATION ‑- PROPERTY ‑- EXCISE ‑- LEASES ‑- TAXATION OF IMPROVEMENTS TO LEASEHOLDS OF PUBLIC PROPERTY

(1) When improvements are added to publicly owned property which has been leased to a person who would not be exempt from ad valorem property taxes if that person owned the property involved, those improvements are subject to ad valorem property taxation as personal property of the private lessee if title to the improvements resides with the private lessee until expiration of the lease.

(2) Where, on the other hand, title to the improvements vest immediately upon their affixation or completion in the public lessor, such improvements are exempted by statute from ad valorem taxation and the private lessee's expenditures for the improvements are subject to the leasehold excise tax.

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                                                                   March 3, 1977

Honorable Robert K. Leick
Prosecuting Attorney
Skamania County Court House
Stevenson, Washington 98648

                                                                                                                   Cite as:  AGO 1977 No. 8

Dear Sir:

            By letter previously acknowledged you requested our opinion on a question relating to the leasehold excise tax under chapter 82.29A RCW.  We paraphrase your inquiry as follows:

            When improvements are added to publicly owned property which has been leased to a person who would not be exempt from ad valorem property taxes if that person owned the property in fee, are those improvements subject to the leasehold excise tax or are they subject to ad valorem taxation?

            We answer your question as set forth in our analysis.

             [[Orig. Op. Page 2]]

                                                                    ANALYSIS

            Your question relates to the impact of the new leasehold excise tax law (chapter 82.29A RCW) upon the scheme of taxation of private leases of publicly owned real and personal property in general, and specifically to the current tax treatment of certain improvements by private lessees to property leased from a public owner.  The legislature enacted the leasehold excise tax law in 19761/ to resolve what the Washington supreme court recently described as ". . . a 6-year controversy over the best and most equitable manner of taxing benefits received by the [private] lessees [of publicly-owned property]. . . ."  See,Japan Line v. McCaffree, 88 Wn.2d 93, 97-98 (1977).  RCW 82.29A.030, codifying § 3 of the act, imposes a leasehold excise tax

            ". . . on the act or privilege of occupying or using publicly owned real or personal property through a leasehold interest . . . at a rate of twelve percent of taxable rent . . ."

            Then, in turn, RCW 84.36.451, codifying § 14 of the act, exempts the following from ad valorem property taxation:

            "Any and all rights to occupy or use any real or personal property owned in fee or held in trust by the United States, the state of Washington, or any political subdivision or municipal corporation of the state of Washington, including any leasehold interest arising from such property as defined in RCW 82.29A.020: . . ."

            Thus, the manifest intention of the legislature in enacting the new tax law was ". . . that the excise tax was intended to replace the ad valorem tax."  Japan Line v. McCaffree, supra, at p. 98.  And, in approaching your question we are mindful of the rule that the primary objective of statutory construction is to carry out the intent of the legislature.  See, e.g.,Anderson v. O'Brien, 84 Wn.2d 64, 524 P.2d 390 (1974).  Moreover, it is well settled that a statute should be interpreted, if possible, so that no portion of it is superfluous, void, or insignificant.  See, e.g.,Snow's Mobile Homes, Inc. v. Morgan, 80 Wn.2d 283, 494 P.2d 216 (1972).

             [[Orig. Op. Page 3]]

            In the leasehold excise tax law, there are two specific references to "improvements" by a private lessee which must be considered.  RCW 83.29A.020(2)(a) provides that in determining the amount of "contract rent" against which the excise tax is imposed, this amount will include ". . . expenditures for improvements to the property to the extent that such improvements become the property of the lessor."  (Emphasis supplied.)  On the other hand in RCW 82.29A.020(2)(a)(iv) it is provided that such "contract rent" does not include ". . . improvements added to publicly owned propertyif such improvements are being taxed as personal property to any person."  (Emphasis supplied.)  Thus, the basic task at hand becomes that of establishing the circumstances under which "improvements" by a private lessee of publicly owned property are to be ". . . taxed as personal property to any person."

            At the outset, RCW 84.04.080 makes it clear that whatever their common law status as either real or personal property might be, for purposes of ad valorem taxation under Title 84 RCW, ". . . all improvements upon lands the fee of which is still vested in the United States, or in the state of Washington . . ." are to be regarded as personal property.2/   With that consideration in mind, it thus also becomes clear that the location of title to such improvements is the determinative factor with regard to their tax status.  If title is in the public owner-lessor then, by virtue of RCW 84.36.451, supra, the improvements are exempt from ad valorem taxation.  Moreover, the right of the private lessee to use such publicly owned personal property is clearly a "lease‑hold interest" under RCW 82.29A.020(1) which is subject to the leasehold excise tax ‑ with expenditures by the private lessee for the improvements in question being included in "contract rent" by virtue of RCW 82.29A.020(2)(a),supra.  Conversely, however, if title to the improvements is still in the private lessee then no exemption from ad valorem taxation can be found in RCW 84.36.451 or elsewhere in Title 84 RCW, so those improvements must be taxed as personal property of the private lessee.  As such, both because the improvements are not "publicly owned" and because of the exclusion from "contract rent" provided for by RCW 82.29A.020(2)(a)(iv),supra, such improvements are not subject to the leasehold excise tax.

             [[Orig. Op. Page 4]]

            This interpretation not only gives full force and effect to all the relevant statutory language but it also avoids the circumstance of such "improvements" being either double taxed (i.e., subject to both ad valorem and excise taxation) or not taxed at all.  Avoiding either of these extreme results is surely consonant with the underlying legislative purpose of the new leasehold excise tax law ". . . that the excise tax was intended to replace the ad valorem tax."  Japan Line v. McCaffree, supra.  Cf.,In re Donnelly's Estate, 81 Wn.2d 430, 436, 502 P.2d 1163 (1972); Alderwood Water Dist. v. Pope & Talbot, Inc., 62 Wn.2d 319, 321, 382 P.2d 639 (1963).

                        Summary

            In summary, then, the tax status of improvements placed by a lessee on publicly owned land will depend, in each case, upon whether, under the lease and/or any applicable statutes,3/ title to the improvements rests in the public lessor or the private lessee.  Where title to the improvements resides with the private lessee until expiration of the lease (i.e., until title shifts to the public lessor) those improvements are subject to ad valorem taxation as personal property of the private lessee, and are not subject to the leasehold excise tax.  On the other hand, where title to the improvements vests immediately upon their affixation or completion in the public lessor, such improvements are thereby exempted by statute from ad valorem taxation and the private lessee's expenditures for the improvements are properly subject to the leasehold excise tax.

            We trust the foregoing will be of assistance to you.

Very truly yours,

SLADE GORTON
Attorney General


RICHARD H. HOLMQUIST
Senior AssistantAttorney General


LEROY E. DREISBACH
Assistant Attorney General

                                                         ***   FOOTNOTES   ***

1/See, chapter 61, Laws of 1975-76, 2nd Ex. Sess., now codified as chapter 82.29A RCW, RCW 84.36.451 and RCW 84.40.175.

2/For the present purposes, it seems clear that the phrase "state of Washington" includes political subdivisions and municipal corporations.  See,New Tacoma Parking v. Johnston, 85 Wn.2d 707, 538 P.2d 1232 (1975), which concerned a private leasehold interest in municipally owned land.

3/See, e.g., RCW 79.01.288 and RCW 79.01.548 which relate to improvements placed by a lessee on state uplands or tidelands.

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