Did Tennessee's four-year property tax exemption for newly built rural electric cooperative facilities pass constitutional muster?

Plain-English summary

Tennessee Code Annotated § 65-25-122(a) said that "all facilities and plants constructed for [a rural electric cooperative's] primary purpose shall be exempt from ad valorem property taxes for a period of four (4) years from and after the date of such construction." Senator Bill Ketron asked the AG whether that exemption was constitutional.

The AG concluded it was not. The starting point was Tenn. Const. art. II, § 28, which declares that all property is subject to taxation and authorizes the General Assembly to exempt only properties falling into specific listed categories: government property, property used purely for religious, charitable, scientific, literary, or educational purposes, and residential property owned by certain elderly or disabled taxpayers. Unlike privilege taxes, where the legislature has broad latitude to grant exemptions, the constitution's text confines property-tax exemptions to those listed categories.

A rural electric co-op, the AG explained, fits into none of those categories. Co-ops are not governmental bodies. They are not used for religious, scientific, literary, or educational purposes. They are not residential property owned by qualifying individuals. The closest plausible category is "charitable," but co-ops fail there too. The Tennessee Supreme Court held in LaManna that "the fact that an organization is chartered for the general welfare, or not for profit, is not sufficient to entitle its property to tax exempt status." Federal and state appellate decisions in other states (Byrd; Bush) directly held that rural electric cooperatives are not charitable organizations. They exist for the mutual financial benefit of their members and provide service for a fee "consistent with sound business principles," which is the opposite of charitable purpose.

Because no constitutional category fits, the AG concluded the four-year exemption exceeded the General Assembly's tax-exemption authority and was unconstitutional.

Currency note

This opinion was issued in 2015. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

Q: Did the AG actually invalidate the statute?
A: No. Only courts invalidate statutes. The AG concluded the exemption was unconstitutional, which is the AG's legal analysis and is persuasive but not binding. Whether the exemption was actually struck down depended on later litigation or legislative action.

Q: Why doesn't "nonprofit" mean "charitable"?
A: As LaManna held and Byrd explained, "charitable" requires a benevolent purpose for the public or an indefinite class. A cooperative corporation is created by a group banding together for "their common advantage or advancement, financial or otherwise." It serves its members. It charges fees for service. Not all nonprofits qualify as charities, and rural electric co-ops are paradigmatically mutual-benefit organizations, not charities.

Q: Could the legislature have crafted a different incentive for rural electric infrastructure that would have been constitutional?
A: Yes. Tennessee Constitution art. II, § 28 allows broad latitude over privilege-tax exemptions. The legislature could also provide direct grants or other forms of assistance that do not run through the property-tax exemption clause. The constitutional problem was specific to the property-tax form of the benefit, not to supporting rural electric infrastructure in general.

Q: What's the practical effect for a co-op's new facility built in 2014?
A: Practically, the AG's view was that the exemption did not validly remove the property from local property tax rolls. A county tax assessor relying on this opinion could assess the property. The co-op's recourse would have been litigation. The opinion is historical for any past tax year.

Background and statutory framework

Tennessee's rural electric cooperatives were created under Tenn. Code Ann. ch. 65, title 25, as "nonprofit cooperative membership corporations" tasked with supplying electric service at "the lowest cost consistent with sound business principles" (§§ 65-25-102(4), 65-25-103, 65-25-104(a)(1)).

The constitutional anchor for property-tax exemptions is art. II, § 28, which says all property "shall be subject to taxation" and then enumerates a closed list of exceptions. Tennessee AG opinions and court decisions consistently treat that list as exhaustive: the legislature cannot create new categories.

The opinion drew the charitable/cooperative distinction from a line of decisions including Byrd v. Blue Ridge Rural Elec. Coop., Inc. (4th Cir. 1954) and Bush v. Aiken Elec. Coop., Inc. (S.C. 1955), which had concluded that rural electric co-ops do not serve "beneficial purposes in the public interest which a charitable association in the accustomed sense, such as a church, college or hospital, is organized to serve."

Citations and references

Statutes:

• Tenn. Code Ann. § 65-25-122(a) (four-year property tax exemption, declared unconstitutional)
• Tenn. Code Ann. § 65-25-102(4) (definition of rural electric cooperative)
• Tenn. Code Ann. § 65-25-103 (nonprofit, sound-business-principles operation)
• Tenn. Code Ann. § 65-25-104(a)(1) (primary purpose, supplying electric service)
• Tenn. Const. art. II, § 28 (property taxation and enumerated exemptions)

Cases:

• LaManna v. Elec. Workers Local Union No. 474, 518 S.W.2d 348 (Tenn. 1974) (nonprofit status alone does not yield property-tax exemption)
• Ga. Osteopathic Hosp., Inc. v. Strickland, 179 S.E.2d 560 (Ga. Ct. App. 1970) (charitable and nonprofit distinguished)
• Michael v. St. Mercury Indem. Co., 92 F. Supp. 140 (W.D. Ark. 1950) (cooperative vs. charitable corporation)
• Byrd v. Blue Ridge Rural Elec. Coop., Inc., 215 F.2d 542 (4th Cir. 1954) (rural electric co-op not a charity)
• Bush v. Aiken Elec. Coop., Inc., 85 S.E.2d 716 (S.C. 1955) (accord)

Related AG opinions:

• Tenn. Att'y Gen. Op. 82-142 (Mar. 18, 1982) (property tax exemption categories limited)
• Tenn. Att'y Gen. Op. 13-11 (Feb. 13, 2013) (broader legislative discretion for privilege-tax exemptions)

Source

• Landing page: https://www.tn.gov/attorneygeneral/opinions.html
• Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2015/op15-71.pdf

Original opinion text

Opinion No. 15-71 (October 21, 2015)

Constitutionality of Property Tax Exemption for Electric Cooperatives

Question

Is the four-year property tax exemption for rural electric cooperatives afforded by Tenn. Code Ann. § 65-25-122(a) constitutional?

Opinion

No. The tax exemption for rural electric cooperatives contained in Tenn. Code Ann. § 65-25-122(a) is unconstitutional because it purports to grant a tax exemption that is not authorized by Article II, Section 28, of the Tennessee Constitution.

ANALYSIS

The statute in question purports to grant a limited property tax exemption for facilities and plants constructed by rural electric cooperatives. The statute declares "that all facilities and plants constructed for [a rural electric cooperative's] primary purpose shall be exempt from ad valorem property taxes for a period of four (4) years from and after the date of such construction." Tenn. Code Ann. § 65-25-122(a).

By definition, rural electric cooperatives are "nonprofit cooperative membership corporations." Tenn. Code Ann. § 65-25-102(4). Their primary purpose is to supply or furnish electric power and energy services to patrons and other entities at wholesale or retail. Tenn. Code Ann. § 65-25-104(a)(1). They are required to operate "on a nonprofit basis and without pecuniary gain, and [to] furnish their services on an area coverage basis at the lowest cost consistent with sound business principles." Tenn. Code Ann. § 65-25-103.

The Tennessee Constitution declares that all property shall be subject to taxation, and it authorizes the General Assembly to exempt only those properties that fall into specific categories. See Tenn. Att'y Gen. Op. 82-142 (Mar. 18, 1982). These categories include property owned by state and local governments, property held and used for purely religious, charitable, scientific, literary, or educational purposes, and residential property owned by elderly and disabled taxpayers. Tenn. Const. art. II, § 28. Thus, the Legislature's authority to create tax exemptions is much more circumscribed as to property taxes than with respect to privilege taxes, over which it may exercise broad discretion in ordaining exemptions. See Tenn. Att'y Gen. No. 13-11 (Feb. 13, 2013).

The rural electric cooperatives covered by Tenn. Code Ann. § 65-25-122(a) do not fall within any of the authorized categories. Rural electric cooperatives are not, and they are not owned by, governmental entities; they do not own residential property; rather, they are nonprofit cooperative membership corporations. See Tenn. Code Ann. § 65-25-102(4). They also are not charitable organizations. Although they operate on a nonprofit basis, they provide electric services for a fee "consistent with sound business principles." Tenn. Code Ann. § 65-25-103.

As the Supreme Court has made clear, "the fact that an organization is chartered for the general welfare, or not for profit, is not sufficient to entitle its property to tax exempt status." LaManna v. Elec. Workers Local Union No. 474, 518 S.W.2d 348, 352 (Tenn. 1974); see also Ga. Osteopathic Hosp., Inc. v. Strickland, 179 S.E.2d 560, 561 (Ga. Ct. App. 1970) (recognizing that the terms "'[c]haritable' and 'non-profit' are not synonymous"). Other courts have distinguished between cooperative corporations and charitable organizations. "A cooperative corporation is created by a banding together of persons for their common advantage or advancement, financial or otherwise, and is organized for the mutual benefit of its members." Michael v. St. Mercury Indem. Co., 92 F. Supp. 140, 144 (W.D. Ark. 1950). A charitable organization, on the other hand, "is organized for some benevolent purpose for the benefit of the public or an indefinite class thereof." Id. A "rural electric cooperative is not designed to accomplish the beneficial purposes in the public interest which a charitable association in the accustomed sense, such as a church, college or hospital, is organized to serve." Byrd v. Blue Ridge Rural Elec. Coop., Inc., 215 F.2d 542, 545 (4th Cir. 1954); accord Bush v. Aiken Elec. Coop., Inc., 85 S.E.2d 716, 720 (S.C. 1955).

Inasmuch as rural electric cooperatives do not fall within any of the exemption categories authorized by Article II, Section 28, the Tennessee Constitution does not permit a four-year property tax exemption for their facilities and plants.

HERBERT H. SLATERY III
Attorney General and Reporter

ANDRÉE SOPHIA BLUMSTEIN
Solicitor General

MARY ELLEN KNACK
Senior Counsel

Requested by:
The Honorable Bill Ketron
State Senator
5 Legislative Plaza
Nashville, Tennessee 37243