Supreme Court rejects challenge to OSU Airport’s tax-exempt status.

Supreme Court rejects challenge to OSU Airport’s tax-exempt status.

The Ohio Supreme Court today rejected a challenge to the Ohio State University Airport’s tax-exempt status, finding the operation of a public airport enhanced the university’s educational programs in a direct and significant manner.

In a 5-2 decision, the Supreme Court acknowledged that several portions of the 325-acre airport, also known as Don Scott Field, were leased to private property owners. However, state law allows a university to claim an exemption for property used by the school even if it collects income from private parties.

Writing for the Court majority, Justice Melody J. Stewart explained that under the state tax exemption claimed by OSU, the university was required to prove the primary use of the property was “for the support” of the institution. Because the airport is completely integrated into OSU’s College of Engineering, and the university conducts educational and research activity on much of the property, the airport property is entitled to the exemption, she wrote.

Chief Justice Maureen O’Connor and Justices Patrick F. Fischer, Michael J. Donnelly, and Jennifer Brunner joined the opinion.

In separate dissenting opinions, Justices Sharon L. Kennedy and R. Patrick DeWine maintained that the property was not entitled to the exemption. Justice Kennedy argued that OSU’s use of the facilities to serve business customers and tenants has eclipsed the school’s educational and research offerings, so that the property no longer qualifies for an exemption. Justice DeWine suggested the property undergo further analysis and be “split-listed,” so that the portions used primarily by private businesses pay property tax.

Taxpayer Challenges Exemption
In 2016, John O’Keeffe, a Franklin Count property owner, challenged the continuing property tax exemption that OSU Airport has claimed since 1943. At the time, the parcel was located in the Dublin City Schools District, but the board of education was not a party to the lawsuit and has not objected to the tax exemption.

O’Keeffe argued that the airport has so materially changed in operation since it originally received a tax exemption for being a flight training school that it no longer was entitled to the exemption. He also asserted that under current state law, OSU could no longer prove the primary purpose of the property was to support education, but rather that it predominantly serves private business interests. If the airport property was entitled to some exemptions, he argued the land should at least be split-listed so that the exemptions only apply to the portions the university can prove are used for non-taxable purposes.

The Ohio tax commissioner denied O’Keeffe’s complaint, and he appealed to the Ohio Board of Tax Appeals (BTA), which affirmed the tax commissioner’s decision. O’Keeffe appealed to the Ohio Supreme Court, which was required to hear the case.

Use of OSU Airport Evolves
At a BTA hearing, OSU Airport Director Douglas Hammon testified that the airport’s operations fall fully under the OSU College of Engineering. The airport qualifies as a “general aviation airport” under Federal Aviation Administration (FAA) guidelines, meaning it is a public-use airport that does not have scheduled services from passenger airlines, but services anybody other than airlines.

The airport was established in 1942 as part of OSU’s “policy of developing a comprehensive program of aeronautics,” and prior to 1959 was a privately owned facility solely used for the benefit of OSU. In 1959 it was opened to public use, and in 1990, OSU adopted a policy allowing the university to receive federal aid to fund airport improvements.

Prior to the opening of a new executive terminal that occurred after O’Keeffe challenged the tax exemption, the airport’s teaching and research facilities included 16 offices, four classrooms, and six laboratories. It also operates a flight-simulation research lab, an unmanned-aerial-systems lab, an aircraft-safety-and-accident investigation lab, and an aircraft-maintenance-technology training facility. The airport is used to support 34 degree programs, 30 of them within the engineering college.

At the time of the challenge, OSU airport was the third-busiest airport in Ohio among airports operated with air-traffic control towers, only behind John Glenn Columbus International Airport and Cleveland-Hopkins International Airport. It ranked 186th out of 517 air traffic control-towered airports in the nation.

O’Keeffe argued the continuing exemption granted to OSU airport since 1942 can be defeated if there is a “substantial material change in operational use of the property since original exemption was granted,” the opinion stated.

The Court disagreed, noting that state lawmakers have generated new exemptions over the years, and that the exemption which OSU seeks was not enacted until 1963. The opinion stated that a property is not stripped of its exempt status when it no longer qualifies for an exemption it could once claim. As long as the property qualifies for an exemption under the law, an exemption can be requested.

Supreme Court Analyzes Exemption Sought
Justice Stewart explained that OSU Airport seeks an exemption under R.C. 3345.17, which allows universities to avoid tax on property used in support of the university. O’Keeffe argued the law requires OSU to prove the land is used primarily for educational purposes.

The Court majority noted that O’Keeffe is correct in stating the “primary-use test” adopted by the BTA is the correct way to determine if OSU is entitled to an exemption, but disagreed with O’Keeffe’s argument that OSU failed the test. O’Keeffe maintained the airport is not entitled to exemption because about 10 percent of the property is used for distinctly educational purposes and 90 percent for non-university activity.

The Court noted his analysis did not compare the solely educational uses against the portions leased for private use. Hammon, the airport director, stated that the students and faculty use most of the airport for educational purposes, giving students “firsthand contact with the things they’re learning in the classroom,” the opinion stated. About 35 of the 100 employees at the airport are students, and not only do students learn from operating the facilities, but several research projects related to airport safety take place there. He argued the mix of aircraft and aircraft support provided at the airport allows the university to learn what is happening with the aircraft industry today.

The Court noted that not only does the airport serve OSU’s educational and research programs, but the operation of a public airport also is itself an activity that can exempt property from taxation under two other separate provisions of Ohio law. To qualify for an exemption, OSU did not have to measure its use of the facility for educational purposes compared with all other uses, but rather against the operations under private control that would require taxation. Based on the educational and research uses and the operation of a public airport, the property qualifies for an exemption, the Court concluded.

The majority opinion also noted that under R.C. 5713.04, the state allows parcels of land used for both tax-exempt and taxable purposes to be split-listed so that taxes are paid on the portions that are taxable. However, under the exemption claimed by OSU, the law allows income to be collected from private parties on the tax-exempt property as long as it is a secondary benefit. Because the income OSU receives from the leases, offices and hangars is secondary, the university does not have to split-list the airport property, the Court concluded.

Airport Property Fails Primary-Use Test, Dissent Maintained
In her dissent, Justice Kennedy explained that “(a)s far as the record shows, the property is used as a general-aviation airport where a few university courses meet and where research is conducted.” OSU’s report on the airport’s 2016-2017 fiscal year indicated that business revenue from non-university users reached about $7.3 million, roughly 85 percent of the airport’s total revenue. Of the 160 aircraft based at the airport, the university owned 19, which were stored in single hangar. Although the airport contained 350,000 square feet of office space, classrooms, labs, and hangars, in addition to other facilities, runways, and tie-down spots, the report identified the university’s teaching and research facilities as covering only 143,000 square feet, she noted.

Because OSU did not produce evidence showing that all of the airport property was used for teaching and research opportunities while also serving airport customers, it failed to prove it was entitled to the exemption, the dissent stated.

Instead, “the evidence presented here demonstrates that the primary and dominant use of the property is to operate the third-busiest towered airport in this state to service private customers and businesses who are not affiliated with the university and who do not use the property to advance the university’s academic mission other than provide revenue for the airport,” Justice Kennedy wrote.

Split-Listing Appropriate, Dissent Suggested
Justice DeWine wrote in his dissent that both the majority and the other dissent were wrong to treat the question of taxability as an all-or-nothing proposition. He pointed out that R.C. 5713.04, the split-listing statute, requires that when property is used partly for taxable purposes and partly for tax-exempt purposes, the property must be split-listed. If the airport facilities were owned by separate entities, no one would dispute that privately leased property would be taxable. Justice DeWine said the case should be sent back to the tax commissioner to determine the uses of each part of the property and tax each portion based on its use.

The dissent stated the majority properly invoked the primary-use test, but has misapplied it. The majority allowed the university to claim that the income-generating portions of the airport property are a secondary use without considering whether those portions of the property also have a primary use supporting the university.

To qualify for the exemption, the activity conducted on the property must have an operational relationship to university activities. But the majority failed to explain how areas of the property housing a car-rental service or being leased for long-term use by private companies are being used in a way that operationally supports the university, the dissent said.

Justice DeWine explained that it isn’t enough to establish an exemption by saying that the airport is an integral part of the College of Engineering.

“Suppose the university wanted to acquire a shopping center. All the university would have to do to get a tax exemption would be to make the shopping center ‘part of’ its College of Business,” he wrote.

And though students undoubtedly benefit from having access to the airport, that does not mean that the property is being used primarily for the support of the university, the dissent stated. Justice DeWine wrote that “some students may feel their college experience greatly enhanced by evenings at the Out-R-Inn, but one would hardly say that that watering hole is used for the support of the university.”

Instead of analyzing the property as a whole, the tax commissioner should require the university to demonstrate how each distinct portion of the airport is being used, and provide exemptions for those portions used primarily to support the university, Justice DeWine concluded.

2020-0134. O’Keeffe v. McClain, Slip Opinion No. 2021-Ohio-2186.

View oral argument video of this case.

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