New Jersey Supreme Court tackles issue of real estate taxation of private businesses on public properties
Gourmet Dining, LLC, is a “for-profit” business entity that had entered into a management agreement with Kean University to operate a “high-end” restaurant called “Ursino” on Kean University property. The Gourmet Dining business is on University property and, as a state school, it is operated on property owned by the State. Union Township had assessed real estate taxes against Gourmet Dining concluding that, while the University property is generally exempt from real estate taxation, because it is used by a private party in connection with an activity conducted for profit, it is subject to taxation pursuant to N.J.S.A. 54:4-1.10. Pursuant to this statute, “’use’ means the right or license, express or implied, to possess and enjoy the benefits of any real property, whether or not that right or license is actually exercised.” The Court addressed several other exemptions from local taxation including N.J.S.A. 54:4-3.3 and 54:4-3.6 and 54:4-2.3. Amicus Briefs were also submitted by several state universities, Rutgers University, Montclair State University, Stockton University, The College of New Jersey and New Jersey Institute of Technology.
The New Jersey Tax Court agreed with Union Township and found that the property was subject to real property taxation. In the Appellate Division, the Tax Court decision was reversed. The Appellate Division panel had determined the matter on a “holistic” view that the real property tax assessment should not be upheld. In its view, because the restaurant is (i) located on campus, (ii) students and parents dine there, (iii) the restaurant provides an alternate dining experience, (iv) because the management fees could be used for scholarships and (v) that the creation of the restaurant enhanced the public perception of the University as a forward looking institution, it should not be taxed.
The Supreme Court reversed the Appellate Division finding that the lease was a taxable lease or “lease-like” interest. The Court rejected the “public benefit oriented” exemptions in this circumstance as unnecessary. Counsel for the Amicus had proposed a technical statutory interpretation rule indicating that the exemption would apply for all “property of the State of New Jersey;…(citing additional limitations).” N.J.S.A. 54:4-3.3. They had asserted that the other designated purposes beyond the semicolon were not applicable. The Court found that while the punctuation argument had superficial attraction, the argument failed in the larger context.
The Supreme Court found that all property of the State is for public use by virtue of the Constitution but that exemptions would not apply to private use of State property. It further failed in light of the requirements for taxing of the leasehold interest. The Court rejected the contention that Gourmet Dining is merely a manager and operator of the restaurant facility. It found that the provisions of the statute were intended to be applicable in a circumstance like this where the legislature did not wish for the citizens to underwrite a local tax obligation of a private operator of a for profit commercial establishment on public property. In sum, the Supreme Court rejected the opinion of the Appellate Division siding with the conclusions of the Tax Court that the statutory exemptions from real estate taxation should not apply.