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The Massachusetts realtors license tax on possessory interests provides that "for the privilege of such use" the property is to be assessed "in the same manner and to the same extent as if such user, lessee or occupant were the owner thereof in fee. . . ." (tax on business use and occupancy held not to constitute property tax, but rather a valid excise upon active commercial use of real estate).
The taxable value of a leasehold interest could be measured in two different ways, either as the market value of the right to use the property or as the market value of the right to assume the lease and make the rental payments called for under it. In the case of a lease calling for full market rent the second measure would be a nominal one. In De Luz Homes, Inc. v. County of San Diego, the California Supreme Court changed the basis of assessing possessory interests in exempt property from this second measure to the first, from the "bonus value" of the lease to its full market value. This is equivalent to the assessment of full ownership interests on the bases of property value rather than the owner's equity. "It would be anomalous to hold that a possessory interest has no value merely because the lessee has agreed to pay what it is worth."
Note that assessments based upon the present value of fair market rent over the term of the lease will produce greater tax upon a lease of longer duration. The lessee holding a ten-year lease will pay more tax than one holding a one-year lease, and the lessee with a ten-year lease will pay more cumulative tax over the term than the total paid by a series of tenants holding ten successive one-year leases upon equivalent property. The exempt reversion under the ten-year lease will be of smaller value than the exempt reversion under the one-year lease in every year except the tenth.
The two sides of this debate were summarized by the dissenting opinion in a 1965 Michigan case concerning taxation of a private contractor's right to use federal government property: Continental Motors Corp. v. Township of Muskegon, held possessory interest tax to be an excise, which could not be enacted by amendment of general property tax law.
Appellant reasons that some portion of the bundle of rights comprising the sum total must be attributed to the United States, and, if so, uniformity and cash value requirements must be violated by a measure which includes the entire bundle. However, the fairest value that can be placed upon the worth of such a possessory interest, during the period in which that interest is used in a business conducted for profit, is the current value of the property. The single, the most important incident of ownership of industrial goods is possession and the right to use them in a business conducted for profit. That right is coextensive with other forms of ownership if it is borne in mind that the tax covers but a one-year period.
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