Who picks up the tab?: A closer look at who is responsible for paying property taxes
By Cristof Traudes
Patrick Todd called it an “honest mistake.”
When six for-profit businesses on Minneapolis Park and Recreation Board property — one right inside the board’s headquarters — just recently received their first property tax bills since signing leases years earlier, the city assessor said they simply had slipped through the cracks. The situation was a rarity, Todd said, but it’s not unheard of.
Just ask other assessors’ offices in Minnesota.
According to state statute, when a for-profit business winds up leasing in or on tax-exempt property, it has to pay property taxes. The law demands it.
At the same time, the state doesn’t provide much guidance for assessors to find those for-profit businesses. There is no law requiring anyone to give a heads up.
“Property taxes are the kind where people expect the Assessor’s Office to give you the assessment and for the treasurer’s office to send you a bill,” said Scott Taylor, who teaches tax law at University of St. Thomas School of Law.
So how are the assessors’ offices doing? In Minneapolis, they found the Park Board-based businesses.
That’s left Don Siggelkow, the Park Board’s general manager for administration and development, miffed — not so much because the businesses are now being taxed, but more because he’s concerned the hit-or-miss nature of the discovery phase isn’t fair.
Why, he asked, are all six of the Park Board-based businesses receiving property tax bills while, for example, 20.21 Restaurant and Bar within the tax-exempt Walker Art Center has never paid a dime?
“It’s time to look at this more seriously,” Siggelkow said.
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Let’s back up a second.
This story is about property being leased by for-profit businesses — rent-paying, non-building-owning businesses — and how they are required to pay property taxes.
“If I’m paying rent, would I expect there to be a property tax?” asked Taylor, the law professor. “The answer is, well, no. But there is.”
That is, if he were running a for-profit that’s leasing space from a tax-exempt body. The requirement is laid out in Minnesota statute 272.01:
“When any real or personal property which is exempt from ad valorem taxes … is leased, loaned, or otherwise made available and used by a private individual, association, or corporation in connection with a business conducted for profit, there shall be imposed a tax.”
While it may be surprising to see a property tax associated with renters as opposed to owners, there are no ifs, ands or buts about the law. The people who deal closest with taxes agree this is not a judgment call.
“I think it’s a factual call,” Hennepin County Assessor Tom May said. “If it’s a business for profit that happens to be leasing from a nonprofit or a governmental agency, they become taxable.”
The understanding is the same in the county next door.
“It shouldn’t really be a question,” said Marvin Dike, a commercial real estate appraiser with Ramsey County.
(There are a few exceptions to the law. For example, if the lease lasts less than a year or it doesn’t involve a significant amount of space — say, 100 square feet in a 100,000 square-foot building — it doesn’t apply.)
Because the taxes are associated with leases rather than property ownership, assessors’ offices don’t get an automatic notice saying a business has moved in. That leaves it to the assessors’ offices to discover them, a situation with seemingly hit-or-miss results.
They could simply ask the tax-exempt bodies to send along notices of new leases.
“But asking the local municipalities to keep sending us an updated list every time they sign a lease is one thing,” Dike said. “Having them carry through may be a whole other thing entirely.”
The story is much the same in Hennepin County.
“If we know of [such businesses] and we see them, certainly we’ll pick them up. But it’s not like there’s a failsafe method for finding them all,” May said. (Hennepin County assesses in every city within its lines but Minneapolis.)
Here, the Assessor’s Office sends out regular surveys, about once every three to four years, said Dana Beasley, supervisor of real estate assessment. That’s how the Park Board-based businesses were found, he said.
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Watchdogs cried foul when they learned six of the Park Board’s tenants had gone years without paying taxes. They were especially critical of Twin City Catering, which leases space on the first floor of the Park Board’s headquarters.
Christine Viken used to own the Van Dusen Center, a Twin City competitor.
“Considering that our property tax bill for 2007 was approximately $75,000, the unfair advantage that they enjoyed really sticks in my craw,” Viken said.
As it turns out, Twin City wasn’t the only catering company that had never paid property taxes. Kelber Catering, located within the Minneapolis Convention Center, still doesn’t.
General Manager Kim Nelson told the Southwest Journal he doesn’t expect to have to.
“If anybody pays property taxes on a building, it should be the owner,” he said.
Siggelkow said he never had heard of tenants of tax-exempt bodies having to pay property taxes. Knowing about it now hasn’t soothed him.
That’s primarily because there are other for-profits within the city that still haven’t been assessed.
Some of the businesses in tax-exempt buildings that are on the city’s books include the restaurants and bars at the Guthrie Theater, city spokesman Casper Hill said. But other tax-exempt bodies are only just getting asked to send in lease information. The Assessor’s Office recently sent inquiry letters to the Minneapolis College of Art and Design, the Minneapolis Institute of Arts, and the Walker Art Center.
Walker spokeswoman Karen Gysin said 20.21 Restaurant and Bar always has operated property tax-free.
“Since we’re a tax-exempt, nonprofit institution, they’re [i.e., 20.21] not required to pay taxes,” Gysin said.
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Despite the confusion about who gets taxed and who doesn’t, Siggelkow said he doesn’t blame anybody.
“To be honest, I think [this issue is] much bigger than Minneapolis,” he said.
He said he’s concerned the law might not set itself up to be fair. Furthermore, the lack of a gray area concerns him, too. He’d like for there to be a way to acknowledge different kinds of arrangements.
Siggelkow said a lot of the leases he creates for Park Board tenants require a fairly heft chunk of sales to be paid to the board. It’s not technically a tax, but it does avoid giving the businesses a competitive edge, he said. It also provides revenue for the Park Board.
If he were to have to incorporate the property taxes into his leases, Siggelkow said he probably would have to lower the amounts paid to the Park Board to keep potential lessees coming. That means less revenue for the Park Board and more money going directly to other public bodies.
In an era where the Park Board is cash-strapped to begin with, he’s asking whether that’s fair.
"It's led me to talk to my [legal] counsel about what our options are," Siggelkow said.