Untitled Texas Attorney General Opinion

State olf¢ Texas
DAN MORALES
ATTORNEY GF,NERAL D.CCCmb€I‘ 20, 1996
Ms. Becky R. Espino Opinion No. DM-429~
Chair, Board of Regents
The Texas State University System R€I TaXainIl Of real property owned
P,O_ Box 1452 by state university and operated as an
Fort Stockton, Texas 79735 amusement park (RQ-872)
Dear Ms. Espino:
You request advice about the taxation of real property owned by Southwest Texas
State University (“the university”), an institution of higher education under the manage-
ment and control of the Board of Regents, Texas State University System.1 You wish to
know whether the property known as “Aquarena Springs” is subject to ad valorem taxes
for 1995.
You inform us that Southwest Texas State University bought Aquarena Springs in
1993 to use as conference and workshop space and to benth aquatic biology and anthro-
pology programs The property consists of a lake, the headwaters of the San Marcos
River, a nine-hole golf course, a theme park, two restaurants, a small hotel, and a
conference building. The university’s application to the Texas Higher Education Coordi-
nating Board for approval of the purchase explained the proposed use of this property'as
follows:
Acquisition of the property will provide needed conference and
workshop space, and would ensure preservation of the unique
ecosystem at the springs, which is home to a variety of rare and
endangered species of plant and animal life. The Edwards Aquifer
Research and Data Center and our highly regarded aquatic biology
and anthropology programs will benefit from the purchase to provide
valuable hands-on experience for our students Over the next several
years, the nature and character of the property will be shifted from an
entertainment focus to an educational focus. We anticipate-
constructing a larger conference center on the property. Interpretive
lEduc. Code § 96.41.
Ms. BeckyKEspino - Page 2 (DM~429)
areas dealing with the environment, ecology and anthropology of the
area would be added to more iiilly develop the area’s educational
potential2
The property was operated as an amusement park by the university’s campus food
service provider under a management agreement entered into on December 1993, and
terminated on October l, 1995. You inform us that educational and other university-
related functions were held on the property during this time. These included internal con-
ferences, several Board of Regents meetings, and academic and course-related activities
The Texas State University System Board of Regents voted on February 24, 1996, to alter
the character of use from an entertainment focus to an educational one.
The management agreement required the food service provider to pay property
taxes on the facility.3 Ad valorem taxes were paid on the property in 1994, but they have
not been paid for 1995, although the university has set aside idnds in an escrow account to
pay them. On behalf of the Board of Regents of the Texas State University System, you
ask whether the Aquarena Springs property is subject to ad valorem taxation for 1995
under section ll.ll of the Tax Code.
A decision about the tax liability of the Aquarena Springs property in 1995
requires the resolution of fact questions about its use.4 Since fact questions cannot be
resolved in an attorney general opinion, we cannot iiilly answer your question, but we can
address the legal issues that it raises.
Article VIH, section l of the Texas Constitution provides that all real property in
the state, “unless exempt as required or permitted by this Constitution,” shall be taxed in
proportion to its value. Article VHI, section 2(a) of the Texas Constitution provides that
2Real Property Application of Southwest Texas State University to Texas Higher Education
Coordinating Board (Oct. l, 1993). See Educ. Code § 61.0572(a)(5) ('I``exas Higher Education Coordinat-
ing Board shall endorse, or delay until next succwding session of legislature, proposed purchase of real
property by an institution of higher education); see also 19 T.A.C. §§ 17.61 - .68 (request for coordinating
board endorsement of real property aequisitions). The Aquarena Springs property was purchased with
coordinating board approval.
3Management Agreement between Professional Food-Service Management, Inc. (“PFM”) and the
Board of Regents, Texas State University System, acting on behalf of Southwest Texas State University
(“SWT”) sec. 1.03.d (Dec. 31, 1993).
4Attorney General Opinion DM-78 (1992) at 4; see also Attomey General Opinion DM-272
"(1993) at ll. Affidavits by administrative personnel of the Texas State University System and Southwest
Texas State University submitted to us do not resolve the questions of fact »
p. 2393
Ms. Becky R. Espino - Page 3 (DH-429)
the “legislature may, by general laws, exempt from taxation public property used for
public purposes.” Section ll.ll of the Tax Code provides the following tax exemptions
for public property used for public purposesi
(a) Except as provided by Subsections (b) and (c) of this
section, property owned by this state or a political subdivision of this
state is exempt from taxation if the property is used for public
purposes,
(b) [land owned by the Perrnanent University Fund]. . . .
(c) [agn'cultural or grazing land owned by a county for the
benefit of public schools under Article VII, section 6, of the Texas
Constitution] . . . .
(d) Property owned by then state that is not used for public
purposes is taxable Property owned by a state agency or institution
is not used for public purposes if the property is rented or leased for
compensation to a private business enterprise to be used by it for a
purpose not related to the performance of the duties and functions of
the state agency or institution
Section ll.ll(e) of the Tax Code provides a tax exemption for property “held or
dedicated for the support, maintenance, or benetit” of an institution of higher education,
but it must not be
rented or leased for compensation to a private business enterprise to
be used by it for a purpose not related to the performance of the
duties and functions of the state or institution or . . . rented or leased
to provide private residential housing to members of the public other
than students and employees of the state or institution
Southwest Texas State is an institution of higher education within this provision.5 Since
article VIII, section 2(a) of the Texas Constitution authorizes the legislature to exempt
public property only if it is used for public purposes, the property described by section
ll.l l(e) is exempt from taxation only if it is used for a public purpose.6 »
5Acr<>rney General opinion JM-551 (1986) ar 7.
6Anorney Generai opinion DM-272 (1993) ar 7.
p.>2394
Ms. Becky R. Espino - Page 4 (DI‘I-429)
In a judicial decision on the ad valorem tax liability of a medical office building
owned'by a hospital authority but leased to private physicians, the court stated as follows:
[t]he legislature is without power to tax any property publicly owned
and held only for public purposes and devoted exclusively to the use
and benefit of the public. [Daugherly v. Ilzompson, 9 S.W. 99 ('l``ex.
1888)]. This analysis was recently reafiirmed in Satterlee v. Gulf
Coast Waste Disposal Authority, 576 S.W.2d 773 (Tex. 1978) (on
rehearing). Therefore, the test is whether the property in question is
held only for public purposes and is devoted exclusively to the use
and benefit of the public. Satterlee, 576 S.W.2d at 779."
The lease of publicly-owned property to private individuals for their own
commercial purposes generally means that the property is not used for a public purpose
and is therefore not entitled to the tax exemption8 Thus, the publicly-owned medical
building was not exempt from property tax, because of the lease it was subject to:
[i]t is undisputed that the appellant’s property was not used
exclusively for the use and benth of the public since private doctors
were leasing part of the property for their own commercial
enterprises9
See also Tax Code § ll.ll(d) (property owned by state agency or institution is not used
for public purposes if it is rented or leased for compensation to private business enterprise
to use for purpose not related to performance of duties and functions of state agency or
institution).
The university asserts that the service agreement did not transfer a leasehold
interest or any other legal interest in the property and that ownership remained in the
university. Although a copy of the service agreement has been submitted to us, we are
unable to determine whether it is a lease or a contract for employment of an agent or
7Grand Prairie Hosp. Auth. v. Dallas County Appraisal Dist., 730 S.W.2d 849, 851 ('I``ex. App.-
Dallas 1987, writ ref’d n.r.e.). See Attorney General Opinions DM-188 (1992) at 3, DM-78 _(1992) at 3.
8Real property held by a political subdivision solely for resale is exempt from ad valorem tax
even though it is leased for commercial purposes or otherwise used for private commercial activity. State
v. City of Houston, 140 S.W.2d 277 ('I``ex Civ. App.-Galveston 1940, writ ref’d); Attorney General
Opinion DM-188 (1992) at 3.
9Grand Prairie, 730 S.W.2d at 851; see Attorney General Opinions DM-188 (1992) at 3, DM-78
at 3 (1992).
p. 2395
Ms. Becky R. Espino - Page 5 (DM-429)
independent contractorlo This oHice does not construe contracts in the opinion processll
Whether a particular relation is that of landlord and tenant is generally a question of fact
for the jury.12 Thus, we are unable to determine whether the property was leased to the
management company to carry out its own commercial enterprise, with the attendant loss
of the tax exemption 13
A determination that the property was not leased for private commercial purposes
would not establish its tax-exempt status, because the property must also have been used
for public purposes in 1995, the year for which tax liability is in question.14 A letter from
the City of San Marcos states that the resort was advertised and operated as a family-
oriented theme park during 1995, charging fees for admission to the park and separate
fees for the inn, the swimming pool and the golf course, The letter also expresses the
belief that the use of the resort for higher education purposes was incidental to use as an
amusement park. The city argues that the operation of the resort as a family-oriented
theme park did not meet the test of a “public purpose.” The university has argued that the
property was used for some educational and other university purposes during 1995.
The arguments from both sides suggest that property owned by the university will
meet the public purpose test only if it is used for educational purposes. However, a brief
submitted in connection with this request argues that property owned by a state university
is exempt from taxation “if it is used for a ‘public purpose,’ not just for a narrowly defined
I°See 49 AM. Jun. 21) Landlord and Tenam §§ 7-11 (1995) (discussing whether unnsacu'on
whereby person manages real estate of another is lease or mere employment as agent or employee). See
also Management Agreement, supra note 3, secs. 1.03.j (PFM will enter into contracts and leases
regarding facility with understanding that it may not subcontract or sublease operations of any part of
facility without SWT’s prior written approval), 1.04 (stating that parties are acting as independent
contractors and that neither party will be employee of other).
llAttomey General Opinions DM-192 (1992) at 10, JM-908 (1988) at 2. The management
agreement in this case raises questions of construction that cannot be resolved solely as a matter of law.
See supra note 9.
12Brown v. Johnson,.12 S.W.2d 543, 545 (Tex Comm’n App. 1929, writ ref'd); 49 AM JUR. 2D,
supra, § 7. ' ``
13See Gmnd Prairie,`` 730 s.w.2d ar 851.
14When the Texas Department of Corrections sought an exemption from county taxation for a
state prison, the court first determined that the state held taxable title to the prison, and then related that
the parties agrwd that a prison was “property used for public purposes.” Texas Dep’t of Corrections v.
Anderson Counly Appraisal Dist., 834 S.W.2d 130, 131 (Tex App.-'lyler 1992, writ denied).
p. 2396
Ms. Becky R. Espino - Page 6 (DM~429)
‘educational function,’ as the taxing authorities contend in their brief.”15 These arguments
raise at least two issues: (l) Is the “public purpose” that entitles the real property of a _
particular state agency or political subdivision to a tax exemption limited to purposes
within the agency’s or subdivision’s.constitutional and statutory authority; and (2) If so,
how is the authority of a state university to _.be defined for purposes of establishing the
entitlement of its property to exemption li'om ad valorem tax?
We have found no judicial decision of a court addressing the Erst issue, but we
question whether the courts would approve a tax exemption for public property used by a
governmental entity for a purpose that was not within its express or implied constitutional
or statutory authorization The legislature, in granting tax exemptions, has made
distinctions along these lines. Thus, university property is not exempt from tax if it is
“rented or leased to provide private residential housing to members of the public other
than students and employees of the state or institution,”16 while the property of a housing
authority used to provide private residential housing is tax exempt17 We also note that
the powers of a home-rule city to use its real property are more comprehensive than the
powers of a state agency in charge of a specific aspect of government18 We acknowledge
that this is an unresolved issue, but we believe the courts would find the statutory and
constitutional purposes of a governmental entity relevant to the kind of public purpose for
which _its property may be exempt from tax. '
With respect to the second issue, we observe that judicial decisions and attorney
general opinions have not defined the function of a university narrowly.19 State
institutions of higher education have authority to undertake a wide variety of activities that
are not strictly educational but that support the educational mission of the university.z°' A
15Lettler Brief from The University of Texas System (Iune 25, 1996).
16Tax Code § l.l.ll(e).
. 17Locai Gov’i Code § 392.005.
18See A&M Consol. Indep. Sch. Dist. v Cilfy of B)yan, 184 S.W.2d 914, 916 (Tex. 1945) (rural
electritication lines owned by home rule city are public property within exemption for ad valorem tax);
Texas Dep ’t of Corrections v. Anderson Counlfy Appraisal Dist., 834 S.W.2d 130, 131 (Tex. App.-Tyler
1992, writ denied) (prison is property used for public purpose).
19See Foley v. Benedict, 55 S.W.2d 805 (Tex. 1932) (authority of University of Texas Board of
Regents over educational matters); Attorney General Opinion 0-4167 (1941) at 7 (authority of University
of Texas.Board of Regents to manage and govern university includes authority to spend appropriated
funds for public relations and frmd-raising).
20Attomey General Opinion DM-329 (1995) at 7.
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Ms. Becky R. Espino - Page 7 (DM-429')
judicial decision upheld a statutory requirement that students attending a state university
pay a student union fee for the purpose of operating, maintaining and improving the
student union, which provided facilities for “various extra-curricular activities of social,
recreational, and educational natures;. all of which are conducted or supervised under the
direction of the Board of Regents.”21 The court observed:
That these activities . . . fall appropriately within the functions of a
present day university does not, we believe, admit of serious
question22
The legislature has also recognized that institutions of higher education engage in
“auxiliary enterprises.” “[A]uxiliary enterprise buildings and facilities” include, but are not
limited to “dormitories, cafeterias, student union buildings, stadiums, and alumni centers,
used solely for those purposes.”23
Nonetheless, as the arguments ii'om both sides suggest, the operation of an
amusement facility is a most unusual activity for a state university The university does
not purport to claim a tax exemption for property operated as an amusement facility to
generate revenue. In view of the educational mission of a university and its traditionally
recognized supporting hinctions, it is highly questionable that land used in such a way
could be described as “held only for public purposes and . . . devoted exclusively to the
use and benefit of the public.”24 In the absence of judicial guidance to the contrary, it is
21Rr:ziney v. Malone, 141 S.W.2d 713 ('I``ex. Civ. App.-Austin 1940, no writ).
221d. at 717.
23Eduo. code § 61.003(14). See Auorney Gonerai opinions H-1248 (1978), JM-999 (1988); see
also Gov’t Code § 2252.061(1) (delining auxiliary enterprise as “a business activity that is conducted at a
state agency [including an institution of higher education], provides a service to the agency, and is not
paid for with appropriated money”).
24Satterlee v. GulfCoast Waste Disp. Auth., 576 S.W.2d 773, 779 (Tex. 1978). Property owned
by a municipal corporation must lawfully be used for public purposes to be exempt from taxation. A&M
Consol. Indep. Sch. Dist., 179 S.W.2d 987, afd, 184 S.W.2d 914, 916 ('I``ex. 1945).
p. 2398
Ms. Becky R. Espino - Page 8 (DM“429)
our opinion that university property operated not for purposes related to education but as
an amusement park to generate income25 is not property used for a public purpose26
The courts might, however, find a public purpose for continuing the operation of
Aquarena Springs for the short term while phasing in educational activities, by analogy to
cases in which real property held by a political subdivision solely for resale qualified for
tax exemption even though it was under lease or otherwise used for commercial
purposes.” Whether this analogy is appropriate in this case depends on all the facts and
circumstances surrounding the university’s operation of the property during 1995.
Briefs submitted in connection with this request reach diH``erent conclusions about
the extent to which the property was used for educational or education-related purposes in
1995. A legal opinion issued by the attorney general cannot resolve questions of fact
about the use of the property, F acts about the actual use of the property, the disposition
of revenues from its operation, and benefits accruing to the university from its operations
25'I``he fact that public property produces revenues does not prevent it from receiving the tax
exemption, if the property is used for a public purpose, so that some portion of the public has a right to use
it under proper regulations and the revenue inures to the public benth of the governmental entity.“ State
v. Houston Lighting & Power Co., 609 S.W.2d 263, 268-69 ('I``ex. Civ. App.-Corpus Christi 1980, writ
ref’d rLr.e.) (citing Lower Colorado River Auth. v. Chemical B.&T. Co.', 190 S.W.2d 48 ('I``ex. 1945));
Galveston WharfCo. v. Galveston, 63 Tex. 14 (1884).
Whether revenue from the operation of Aquarena Springs inured to the public benefit would
require an analysis of the fiscal provisions of the Management Agreement and information from the
amounts of the facility’s operation See Management Agreement, supra note 3, secs. 1.03 (listing services
to be provided by PFM at expense of facility, including liability insurance covering PFM and SW'I'), .06
(PFM shall contribute up to $50,000 for long-termplan for facility), .08 (PFM will use its highest
professional skills to provide SWT with maximum economic return consistent with principles of proper
management); 2.01 - .04 (SWT will pay PFM first-year management fee of $250,000 plus percentage of
annual net sales, up to maximum fee of $500,000); 3.01 (SWT will establish working capital account of
$500,000 to cover operating cash shortfall, to be reimbursed from net sales).
26State institutions of higher education operate athletic and recreational facilities in connection
with the statutory and constitutional purposes of these institutions, and our remarks are not intended to
raise any question about the public purpose served by such facilities, see Attomey General Opinion M-832
(1971) (football stadium), or by recreational facilities provided by governmental entities pursuant to
statutory authority, see Attomey General Opinion WW-1074 (1961) (lease of county-owned stadium for
purpose of conducting professional sporting events, rodeos, festivals, fairs, recreational activities,
concerts, conventions and civic events).
27See supra note 7.
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Ms. Becky R. Espino - Page 9 ’ (DM-429)
would be relevant to this determination Facts about the university’s purpose in
continuing to operate Aquarena Springs are also relevant.28
S_UML'\_M_
State-owned property used for public purposes is exempt from
taxation Whether the Aquarena Springs property owned by
Southwest Texas State University is subject to ad valorem tax for
1995 involves questions of fact that cannot be resolved in the opinion
process.
Yours very truly,
DAN MORALES nn
Attomey General of Texas
JORGE VEGA
First Assistant Attomey General
SARAH J. SHIRLEY
Chair, Opinion Committee
Prepared by Susan L. Garrison
Assistant Attomey General
28'I'he Tax Code establishes prowdures for resolving disputes between taxing unit and taxpayer.
See Tax Code § 41.41 (taxpayer protest before appraisal review board); id. ch. 42 (iudicial review of order
of appraisal review board); see also id. § 33.41 (suit by taxing unit to collect delinquent taxes).
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