Washington State

Office of the Attorney General

Attorney General

Bob Ferguson

AGO 1954 No. 309 -
Attorney General Don Eastvold


1. In a lease in which the University of Washington is lessor and a private individual is lessee, the leasehold interest is taxable to the lessee.

2. A provision allowing deduction of taxes against the leasehold interest from future rental payments does not prevent the leasehold interest from being held taxable.

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                                                               September 1, 1954

Honorable E. C. Huntley
Washington State Tax Commission
Insurance Building
Olympia, Washington

                                                                                                              Cite as:  AGO 53-55 No. 309

Dear Sir:

            We have your recent letter with a copy of a lease dated July 18, 1953, by and between the Board of Regents of the University of Washington and University Properties, Inc.  In connection with this lease and particularly in regard to Article VIII thereof you ask our opinion on the following two questions:

            1.         Would the payment of tax on the leasehold estate by the Lessee be classified as a direct tax against the Lessor, or just a conditional clause in the lease, when such tax paid by the Lessee may be deducted from the annual rents paid by the Lessor?

            2.         If the tax should be classified as a direct tax against the Lessor, will Legislation similar to Chapter 217, Laws of 1951, allowing Seattle City Light to pay in lieu of taxes have to be enacted by the Legislature?

             [[Orig. Op. Page 2]]

            We conclude that a payment of tax by the lessee on the leasehold estate would not be classified as a direct tax against the University of Washington and that thus such leasehold is taxable against the lessee.


            Article VIII of the lease reads in part as follows:

            "Lessee agrees, after due notice to Lessor allowing time for contest, to pay any general real property taxes, or payments in lieu thereof, any taxes imposed or which may be imposed upon the leasehold estate created by this lease or the rents paid by Lessee to Lessor hereunder, all local improvement district assessments and charges and all costs in connection with the paving and lighting of the non-municipally-owned [[ nonmunicipally-owned]]streets within the demised premises, it being understood, however, that, as to such taxes, assessments, charges and costs so paid, an equivalent amount may be deducted from the next forthcoming rent payment or payments to Lessor herein."  (Emphasis supplied)

            For convenience we will reduce the first question to two sub‑questions, as follows:

            (a) Is a leasehold interest in which the University of Washington is lessor and a private individual or corporation lessee taxable to the lessee; and

            (b) If the answer to (a) is in the affirmative does a provision in such a lease requiring the University of Washington to deduct from future rental payments the amount of such tax render the leasehold estate nontaxable?

            The supreme court of this state, on three occasions, has passed on question (a) and on each occasion has held that a lease between the University of Washington and an individual which had been assigned to the Metropolitan Building Company was taxable to the lessee.  Those cases are:

             [[Orig. Op. Page 3]]

            Metropolitan Building Company v. King County, 62 Wash. 409 (1911);

            Metropolitan Building Company v. King County, 64 Wash. 615 (1911);

            Metropolitan Building Company v. King County, 72 Wash. 47 (1913).

            In the first of the above cited cases our supreme court, speakingen banc through Judge Chadwick said on page 411:

            "* * * If the real property upon which the buildings are erected were owned by a private individual, we apprehend that the question raised in this case would not have occurred; for, unless controlled by the contract of the parties, the real property would be assessed to the owner of the fee, while the leasehold would be assessed to the lessee.  The fact that the fee is in the people of the State of Washington does not alter the rule."

            On the basis of the authorities cited above, the transaction is, in legal contemplation, the same as if consummated between private parties.  The answer to subquestion (a) must be in the affirmative.

            Turning to subquestion (b) we first desire to call to your attention the case ofEsso Standard Oil Co. v. Evans, 345 U.S. 495 (1953).  In that case the Defense Supplies Corporation, a government agency specifically exempt from state storage and use taxes because of certain federal statutes and regulations, found itself under the necessity of leasing certain gasoline storage facilities owned by the appellant, Esso Standard Oil Company, in the State of Tennessee.

            In the lease contracts between the Defense Supplies Corporation and the Esso Standard Oil Company, the United States agreed to assume liability for all state taxes.  The State of Tennessee demanded that the Esso Company pay a tax for the privilege of storing such gasoline within the state under certain state taxing statutes.  The tax was paid under protest, the United States intervened in the trial court and pleaded that the tax was barred by the constitutional doctrine of intergovernmental immunity, and in this position the Esso Company joined.

             [[Orig. Op. Page 4]]

            In answering this contention the United States Supreme Court, speaking through Mr. Justice Reed said, on pages 499 and 500:

            "This tax was imposed because Esso stored gasoline.  It is not, as the Allegheny County tax was, based on the worth of the government property.  Instead, the amount collected is graduated in accordance with the exercise of Esso's privilege to engage in such operations; so it is not 'on' the federal property as was Pennsylvania's.  Federal ownership of the fuel will not immunize such a private contractor from the tax on storage.  It may generally, as it did here, burden the United States financially.  But since James v. Dravo Contracting Co., 302 U.S. 134, 151, * * * this has been no fatal flaw.  We must look further, and find either a state immunity created by Congress in the exercise of a constitutional power, or one arising by implication from our constitutional system of dual government.

            "Neither condition applies to the kind of governmental operations here involved.  There is no claim of a stated immunity.  And we find none implied.  The United States, today, is engaged in vast and complicated operations in business fields, and important purchasing, financial, and contract transactions with private enterprise.  The Constitution does not extend sovereign exemption from state taxation to corporations or individuals, contracting with the United States, merely because their activities are useful to the Government.  We hold, therefore, that sovereign immunity does not prohibit this tax."  (Emphasis supplied)

            Another case on the same point is that of Hampton Beach Improvement Co. v. Town of Hampton, (N.H.) 92 Atl. 549, 1914.  In that case the town of Hampton contracted with the lessee, Hampton Beach Improvement Company that if it, as a municipality, assessed and collected taxes on land leased to the Improvement Company, that the Improvement Company might deduct the amount of taxes paid  [[Orig. Op. Page 5]] from the annual rent due to the town of Hampton.  In passing upon the point which we are here considering, the supreme court of New Hampshire said, on page 549:

            "The argument that the covenant in the lease amounts to an agreement to exempt the lessee from the burden of taxation which it was bound to bear is not well founded.  An exemption from taxation is in the nature of a gratuity, while the agreement here is a part of the consideration for the payment of a certain rental.  It is merely a matter of contract between the lessor and the lessee.  Morrison v. Manchester, 58 N.H. 538, 556.  What the town lost in taxes as a municipality it gained in rent as a lessor.  Such a provision is not infrequently found in leases between individuals.  In making it the town acted in a private capacity, and is therefore subject to the usual private obligation.  It was making a contract touching the price to be paid for the use of the land.  If tax free, it was worth a rent as much larger as the probable annual tax.  It must be assumed that the rent agreed upon included the amount of this probable burden which was assumed by the lessor.  The substance of the transaction is not a tax exemption, but a contract by the town, as a private corporation, that for an agreed price it will (among other things) pay the tax on this land."  (Emphasis supplied)

            From the above, we are convinced that neither the quoted provisions of Article VIII of the lease, nor the lease as a whole, transfers the immunity that the University of Washington enjoys from property taxation because of its being a state agency, to University Properties, Inc.  It is our opinion that the leasehold interest is taxable to University Properties, Inc.

            As we read your letter, the above answers to your first question make it unnecessary to answer the second.  We hope that the above will be of assistance to you.

Very truly yours,

Attorney General

Assistant Attorney General