Untangling the web: Taxable business and tax-exempt land

The for-profit Tin Fish operates on tax-exempt Minneapolis parkland near Lake Calhoun; it will pay $7,983.44 in property taxes this year. The for-profit Kelber Catering operates in the tax-exempt Minneapolis Convention Center; it does not pay property taxes.

The for-profit Sea Salt Seafood restaurant operates on tax-exempt parkland near Minnehaha Falls; it will pay $7,471.09 in property taxes this year. The for-profit Wolfgang Puck runs the upscale 20.21 Restaurant & Bar at the tax-exempt Walker Art Center; it will not pay property taxes.

Confused?

State statute 272.01 says when tax-exempt property, “is leased, loaned, or otherwise made available” to a for-profit business, it should pay property tax “in the same amount and to the same extent as though the lessee or user was the owner of such property.”

Minneapolis City Assessor Patrick Todd said state law doesn’t give assessors much direction on how to apply the law in individual cases. Assessors rely on Minnesota Tax Court precedents, he said. They look at similar situations in other cities. Assessors also look at how “reasonably necessary” the particular use is to the tax-exempt organization’s mission to determine whether it should pay taxes.

“That is a judgment call,” Todd said. “There is definitely some interpretation to this.”

That leads to questions of fairness. Why do some business on tax-exempt property pay taxes and others do not?

Inquiries from the Daily Planet triggered a city review of several businesses operating in tax-exempt space—including those at the Walker and Convention Center—and whether they should pay personal property taxes.

How this began

The tax questions grew out of a recent spat between the Minneapolis Assessor’s office and the Minneapolis Park and Recreation Board.

On July 27, the Daily Planet ran a story on how the City Assessor had begun taxing several for-profit businesses on tax-exempt park property. They were: Twin Cities Catering (located in the Park Board headquarters); Mintahoe (at the Nicollet Island Pavilion); Prom Catering (at Columbia Golf Course) and Sea Salt.

During an interview, Don Siggelkow, the Park Board’s general manager for administration and development, questioned whether the city used the same scrutiny on the Metrodome vendors or Kelber Catering as it did on the Park Board’s business partners.

“It is a can of worms,” he said. “If you are going after us, are you going after everyone else? Let’s be fair about it.”

Next, a Daily Planet reader had a related question: What about for-profit restaurants running in tax-exempt spaces: Cue at the Guthrie, 20.21 at the Walker or the D’Amico & Sons-run ArtsCafe at the Minneapolis Institute of Arts? Do they pay taxes?

The Daily Planet took Siggelkow’s questions and the reader’s questions and posed them to Todd. After waiting more than two weeks for a return call, the Daily Planet called again. He said staff was still doing research.

Dana Beasley, supervisor of real estate assessment, said the city sent out standard inquiry letters to the Metropolitan Sports Facilities Commission, the Walker, the Minneapolis Convention Center and the Minneapolis Institute of Art seeking copies of their business agreements and other information related to their tax-exempt status.

“Some of the information we have gotten back and it is being reviewed by the City Attorney to see if it is taxable,” Beasley said.

The city already has assessed the Guthrie’s bars and restaurants, he said. The Guthrie has filed an appeal.

Tax-exempt commentary

The property tax paid by businesses operating on tax-exempt land is called “personal” property tax, even though it is based on the value of the real estate. Real estate property tax depends on the assessed valuation of the real estate, based on such things as the income it generates, market value or cost, whichever method fits. However, property tax on tax-exempt land has a different lien. The county won’t seize parkland if the park-related business owner fails to pay taxes. Instead, the tax debt follows the taxpayer, not the piece of property. Therefore, it is called “personal” property tax, (not to be confused with a former personal property tax which assessed businesses for their equipment, inventory, and other personal property.)

While waiting for a return call from the assessor, the Daily Planet called several nonprofits and public entities with restaurants or concession stands to ask if they paid personal property tax.

Karen Gysin, associate director of public relations for the Walker, said the art center is tax-exempt and doesn’t pay property taxes—and because Wolfgang Puck is a tenant it doesn’t pay property taxes either.

Kim Nelson, Kelber’s general manager, said businesses pay property tax if they own land and a building: ”We don’t own a property.”

Lynette Nyman, press and public relations manager for the Minneapolis Institute of Arts, said D’Amico manages the museum’s restaurants, which are patron amenities. “The restaurants are ours,” she said.

Dennis Alfton, director of operations for the Metropolitan Sports Facilities Commission (MSFC), said the Metrodome concessionaires don’t need to pay taxes because they work like consultants. The commission owns the building and equipment. “We pay them a fee, 5 percent of the net profits, to provide that service,” he said.

Hennepin County Assessor Tom May said the MSFC has the added advantage of having “a super exemption.” “We lost on that one years ago,” he said.

Hennepin County does the assessments in each city except Minneapolis, which has its own assessor. May said sometimes assessors are not informed when for-profit businesses move into tax-exempt spaces.

“Thee is no automatic notice that A&B coffee shop is now in this public building or a hospital,” he said. “We are always on the look out for that kind of thing.”

State law requires assessors to reevaluate tax-exempt property every six years, he said. Beasley said the city sends out a standard inquiry letter to tax-exempt properties every three years.

Legal tangle

One question the Minneapolis Assessor might need to decide is whether it makes a difference—from a property tax point of view—if the business operating on tax-exempt land owns the equipment or just acts as a manager.

“That is an interesting question,” Todd said. “I have never had to make a determination on that.”

The Park Board is eager to learn about how the city makes the personal property tax decisions. Revenue it receives from businesses operating on Park Board property supports Park Board programs, and the taxes effectively reduce that support.

Once the Park Board understands the city’s reasoning, it could renegotiate contracts and avoid the taxes. “I think we will probably have to do our own investigation now that we know some [businesses] aren’t paying,” Siggelkow said.

Park Board update

Several Park Board contracts require business partners to pay property taxes, if assessed. The contract with Schwick Inc. at the Lake Harriet refectory does not, Siggelkow said.

That means the Park Board eats the concession stand’s $6,959.53 2008 tax bill. Schwick pays it, but deducts it from its lease payment. Schwick’s contract generates approximately $34,000 for the Park Board, according to the Park Board’s 2008 budget. (The original Daily Planet story incorrectly reported that Schwick started paying taxes this year. Its payments started in 2006.)

The original story also reported that the Tin Fish owners started paying property taxes in 2007. Owners Sheffield and Athena Priest said they started paying in 2006. In 2007 the city changed the taxpayer name—from the Priest’s name to SNP Enterprises—and also changed the ID number, making it difficult to track the paper trail.

Taxing questions

Information on “personal” property tax lacks the modern tools of transparency. Most Hennepin County property tax information is available online. However, it does not include “personal” property taxes on businesses operating on tax-exempt property.

The Daily Planet gave the City Assessor a list of five businesses operating on tax-exempt land and asked if they paid property taxes. Beasley said those questions were taking a lot of office time and resources to answer.

Todd said the city used to have a staff person focusing on tax-exempt property, but budget cuts eliminated that position. Beasley now has responsibility for tax-exempt property in addition to other supervisory duties.

Scott Russell is a journalist. He wrote for the Southwest Journal and Skyway News (now the Downtown Journal) in Minneapolis from 1999-2005. He also wrote for The Capital Times, a Madison Wisconsin daily, from 1993-1999.