A History of the OCLC Tax-Exemption Status

One of the baffling elements I've found in discussions of the history of OCLC is that of its tax exempt status under Ohio law. The latest example of this comes from documents filed in the SkyRiver/Innovative-vs.-OCLC case that make disparaging remarks about how OCLC got its state tax-advantaged status. (The text of the remarks in those documents are included below.) I was curious about this a while back and so did some research on the topic. I had set it aside and forgotten about it until this latest lawsuit brought it up again. So, to set the record straight, here is at least one version -- hopefully written from a neutral perspective -- of what happened nearly three decades ago.

A couple of notes before we begin. First, the title of this post purposefully starts with an indefinite article. This is not the story; this is a story that I have managed to piece together. I don't do legal research and legislative history for a living, but I did have a class in those topics during library school. (Hi, Professor Wise!) This should not be considered a definitive version...it is as best as I can piece together.

Second note. Many of the documents come from LexisNexis Academic Universe. Even though the documents themselves are in the public domain (being of government origin), I'm not sure the LexisNexis versions can be openly published because they contain information from the LexisNexis editors. ((See this discussion of FriendFeed to get a sense of the frustration in trying to figure out the LexisNexis Academic Universe Terms and Conditions.)) I could publish the raw documents if I were to go to the various governement offices that have this information and make copies, but that -- quite frankly -- is more effort that I'm willing to put into this project. So you'll either have to take my word for it or look up the citations (provided in the text below) yourself if you have access to LexisNexis Academic Universe.

Third note. This post only deals with the tax status of OCLC as it relates to Ohio law. In other words, the taxes that OCLC would owe to the State of Ohio. OCLC's exemption from federal income taxes under section 501(c)(3) of the Internal Revenue Service Code is another matter entirely. I'm sure there is a paper trail to that as well (part of which includes the IRS Form 990 declarations from which details of the SkyRiver/Innovative complaint are drawn), but I don't know how to get to it.

The Origin

We start with a request OCLC made to the Ohio Tax Commissioner in 1980. This summary comes from the decision of the Ohio Board of Tax Appeals in 1983: ((OCLC Online Computer Library Center, Inc., Appellant, vs. Robert R. Kinney, Commissioner of Tax Equalization, Appellee. CASE NO. 81-D-602 (REAL PROPERTY TAX) STATE OF OHIO -- BOARD OF TAX APPEALS. 1983 Ohio Tax LEXIS 162. October 11, 1983.))

On January 23, 1980, appellant, OCLC Online Computer Library Center, Inc. (hereinafter referred to as "OCLC"), filed an application for real property exemption pertaining to certain land located in Dublin, Ohio, together with the five-story building and other improvements thereon, relating to the tax year 1979 and thereafter. The Commissioner denied OCLC's application for exemption. OCLC has appealed from such denial to this Board.

On September 3, 1981, the Ohio Tax Commissioner denied the appeal. I don't have a copy of that decision, but the decision at the appellate level includes the text of the appeal from OCLC. Based on that text, it seems like the denial was based on the "fact that Appellant's real property is not used exclusively for charitable purposes" as defined by the Ohio Revised Code (sections 5709.12 and 5709.121, if you must).

There are numerous references to case law in Ohio that OCLC used in its appeal that I won't list here, but there are two references to what I would offer are core values of OCLC that were refuted by the Ohio Tax Commissioner:

The Commissioner erroneously held as a matter of law and fact that Appellant OCLC failed to establish its uniquely charitable purpose of furthering the growth of human knowlege. The Commissioner's narrow focusing upon and findings regarding Appellant OCLC's provision of services at a cost savings improperly ignored other substantial elements of Appellant OCLC's charitable purpose and interactivity with its library members.

The Commissioner erroneously held as a matter of law and fact that there is nothing unique in the nature of Appellant OCLC's services that would make it an unlikely service to be engaged in by private enterprise. The essence of Appellant OCLC is the cooperative sharing of the bibliographic records of all its member libraries and the completeness of the resulting data base in which all its library members have a beneficial right of ownership and use and without which Appellant OCLC as a national library resource would not exist. It is an accident of fate that the resource is physically located in the subject real estate.

The Appellate Court Decision

The decision from the appellate court goes on at some length ((For instance, the decision from the appellate court says:

On February 3, 4, 5, and 8, 1982, a hearing was held for the purpose of permitting the parties hereto to provide additional evidence, as authorized by R.C. 5717.02. Both parties were represented by counsel. A transcript of such proceedings (pp. 1 - 730, comprising 4 volumes) was subsequently filed.

...to which I say, "Wow! 730 pages of transcripts!")), including an interesting snapshot of OCLC technology to serve its members as it existed in the early 1980s. It then gets to the heart of the matter (legal citations removed for sake of clarity):

An institution which has as its essential purpose the accumulation of bibliographic catalog data supplied by members organizations which is then made available to and for the use of its member organizations is not a "public college," "academy," or "public institution of learning" as such terms are used in [Ohio Revised Code Section] 5709.07. While it may by true that OCLC may actually teach individuals concerning the nature of the data stored in OCLC's computer data base and how to use OCLC's equipment in obtaining such data information through the use of OCLC's equipment, such teaching process primarily subserves OCLC's fundamental purpose of providing information as to the existence, owner and holder of particular books and other educational materials and a means to make arrangements to obtain such educational materials, if desired.

In the last analysis, OCLC is not an institution having a teacher-student character. OCLC is in the business of selling, leasing or renting equipment and facilities capable of providing information and access to written information, primarily in form the of books, held in public or private libraries of OCLC's member organizations. The providing of such information by OCLC in the form of printed bibliographic catalog cards or via telephonic terminal connections with OCLC's computer facilities, is primarily, if not solely, for members contracting with OCLC and for an established per transaction price paid by the member organization obtaining such information.

[...]

Although a laudable purpose, the business of providing a computerized library network, the storing of library related bibliographical catalog data, and the selling or licensing the use of equipment necessary to gain access to such stored data or to communicate with member organizations having a contractual relationship with OCLC, is not a charitable purpose. There are many data processing corporations providing data storage capabilities for the benefit of its users. The providing of date storage or data processing services and equipment for an established price, whether for profit or otherwise, is not a charitable purpose or activity.

The fact that the particular users of data storage or data processing services may be charitable institutions that may benefit, in terms of cost, in obtaining information from a data storage or data processing organization below what would otherwise be involved, in terms of time and cost in obtaining like benefits, does not thereby make the supplier of such services and facilities a vicarious charitable institution merely because the facilities supplied are so immediate, intertwined and necessary to the efficient conduct of the users' charitable activities.

...The subject real property is used to house, maintain and sell its computerized services and equipment to its member library organizations. Such services and facilities are not sold directly to the general public nor made available by OCLC directly to the public. Such sales are made only to member organizations having a contractual arrangement made with OCLC under which the member organizations agree and provide bibliographic data pertaining to their own library holdings of books and related materials and agree to pay a per transaction cost for use of OCLC's data and system. OCLC does not offer or provide its services and facilities directly to the general public or offer or provide the same except upon a contractual arrangement and an obligation to pay therefor....

The evidence does indicate that OCLC has in fact produced a "profit" in the sense that it has accumulated operating revenues in excess of operating expenses although, by virtue of being a non-profit corporation, such profits are not directly distributable as such to its member organizations.

Although OCLC contends that the Commissioner's findings of fact and conclusions of law are erroneous, upon review of the Commissioner's findings and conclusions of law we find that they are reasonable and proper in all respects.

The Board of Tax Appeals finds and determines upon the record as a matter of law that all specifications of error are without merit.

IT IS ORDERED that the Commissioner of Tax Equalization's final determination, rendered by Journal Entry, dated September 3, 1981, here involved, should be, and hereby is, affirmed.

The Ohio Supreme Court Decision

OCLC took the case to the Ohio Supreme Court. In a decision on June 20, 1984, the Ohio Supreme Court upheld the the decision of the appellate court and the tax commissioner. This decision summed up the previous events this way: ((OCLC ONLINE COMPUTER LIBRARY CENTER, INC., APPELLANT, v. KINNEY, COMMR., APPELLEE. No. 83-1713 Supreme Court of Ohio. 11 Ohio St. 3d 198; 464 N.E.2d 572; 1984 Ohio LEXIS 1136; 11 Ohio B. Rep. 509))

OCLC's membership consists of one hundred eighty-four academic and public libraries in Ohio, and over two thousand six hundred libraries throughout North America. Its services are not directly available to the public at large. Members are charged a fee, and in return they receive terminal equipment for online access to OCLC's computer facilities via dedicated telephone lines. OCLC further provides personnel and equipment in order to service and maintain its customers' computer terminals and other associated computer hardware. The bibliographic holdings of member libraries are entered into the data base for access by all other member libraries, thus facilitating the location of books and materials held by member organizations, and simplifying procedures for inter-library book transfers.

OCLC also provides cataloging information to member libraries. For example, when a library purchases a book already owned by another member library, a search of OCLC's data is made and, because the bibliographic record already exists in the data base, a catalogue record can be generated at a greatly reduced cost.

In addition to the aforementioned services, OCLC has engaged in research for companies, including Bank One of Columbus and Warner Amex QUBE, a cable television company. On one occasion, OCLC performed research for a telecomputing firm and, in return, was offered fifty percent of the firm's stock for an additional price of one dollar.

The Commissioner of Tax Equalization (hereinafter "commissioner") denied the exemption on the basis that OCLC is neither a "public college or academy" or "public institution of learning," as those terms are employed under R.C. 5709.07, nor was the property found to be used "exclusively for charitable purposes" so as to entitle OCLC to an exemption under R.C. 5709.12. On appeal, the Board of Tax Appeals affirmed. In its appeal to this court, OCLC has abandoned its argument for an exemption as a public institution of learning in conjunction with R.C. 5709.07, and, as such, contests only the board's determination that it failed to meet the qualifications for a charitable exemption under R.C. 5709.12.

Some excerpts from the legal reasoning in deciding the case:

OCLC submits that because it serves libraries, which in turn benefit the general public through the dissemination of knowledge for the edification and improvement of mankind, it qualifies as an institution furthering human knowledge and, therefore, is a charitable institution. This argument, however, simply constitutes an attempt by OCLC to obtain a vicarious charitable exemption by virtue of the activities of its customers.

In Joint Hospital Services v. Lindley (1977), we rejected a similar vicarious charitable exemption theory. In that case, a group of hospitals pooled their resources and established a laundry and linen service for their members, as well as for several other non-profit organizations.

As in the present case, the taxpayer relied upon the charitable status of its customers as the basis for seeking a charitable exemption. The court observed, however, that notwithstanding the charitable nature of the institutional customers who obtained the laundry and linen services, it is the charitable activities of the taxpayer seeking the exemption which must be considered when reviewing an application for a charitable exemption. Although a laudable purpose, the taxpayer's laundry and linen service neither improved health nor alleviated illness and, accordingly, the exemption was denied.

So, too, in the instant cause, the record demonstrates that OCLC's activities more closely resemble those of a publisher of library materials or a data base firm specializing in information retrieval, such as Lexis or the New York Times Information Bank, rather than that of a library. Although OCLC's service may greatly enhance the ability of libraries to better serve the public, OCLC essentially offers a product to charitable institutions, for a fee exceeding its cost, and, as the board concluded, is not itself a charitable organization.

In addition, OCLC fails to address the effect that its commercial fee paying research endeavors have upon its status as an organization seeking a charitable exemption. ... Such commercial research endeavors have previously been determined by this court to preclude the issuance of a charitable tax exemption. Moreover, although OCLC may have originated as a charitable organization upon its creation in 1967, the organization, which now operates throughout North America for any library willing to pay its fee, and which engages in fee paying research projects for the private gain of commercial industries, has since transcended the realm of a charitable institution.

For the foregoing reasons, the decision of the Board of Tax Appeals, being neither unreasonable nor unlawful, is affirmed.

The New Law

Now we get to the part where the state legislature essentially negated the Ohio Tax Commissioner's argument by carving out an exemption for OCLC. One might think that "carving out" is a pejorative phrase, but I know of only one organization that meets the definition decribed below. A new section of the Ohio Revised Code giving OCLC its special status was added in a law that went into effect on September 11, 1985 as part of a large tax restructuring. Why this tax restructuring happened is an interesting story, but tangential to the topic at hand. (See the full story at the end of this post under the heading "A Brief History of the State Support of Libraries in Ohio.") Ohio Revised Code contains section 5709.72 says:

Section 5709.72. Library technology development exemption

All tangible and intangible personal property shall be exempt from taxation if the following conditions exist in the year for which exemption is sought:

1. The owner is a nonprofit corporation that is exempt from federal income taxes under the provisions of section 501(c)(3) of the Internal Revenue Code of 1954, as amended, and the owner's primary purposes are conducting research and development in library technology and providing computerized or automated services to public, charitable, or educational libraries;
2. The property is used in any of the following:
   1. Furnishing services to libraries and to similar information resource agencies or institutions whose activities directly benefit libraries, provided at least eighty per cent of the owner's revenues from furnishing those services are paid by libraries, agencies, and institutions that are public, charitable, or educational;
   2. Conducting research and development in technology specifically for use in libraries, the majority of which are public, charitable, or educational;
   3. Providing products, internal support, or auxiliary services related to activities described in divisions (B)(1) and (2) of this section.

Section 5709 of the Ohio Revised Code contains the various types of organizations exempt from reporting personal property for the purposes of taxation. The legislative history of how this section came to be added to the Ohio Revised Code is probably lost in the mists of time; we don't know who proposed it or why.

The Link to the "SkyOCLC" Case

What brought this all to mind recently was when I was reading through the motions filed by SkyRiver/Innovative and OCLC in their California anti-trust case. The memorandum in opposition to OCLC's motion to transfer the case to Ohio has this bit (emphasis added): ((SkyRiver Technology Solutions, LLC et al v. OCLC Online Computer Library Center, Inc., Document #20, page 13 line 21 through page 14 line 5))

OCLC argues that because the Complaint alleges that OCLC has abused its tax-exempt status, the interests of the Ohio court are greater than the interests of this California Court. The purported reason given is that the court’s decision may have an impact on other Ohio nonprofit corporations. This Court, however, is not going to determine OCLC’s state or federal tax-exempt status nor would an Ohio court. Moreover, OCLC has not explained how any impact on other nonprofits involved in other unrelated activities would result whether this case is tried in California or Ohio. Nor has OCLC explained why a federal court decision will affect only nonprofits in Ohio. In fact, the Supreme Court of Ohio in 1984 determined that OCLC was engaged in commercial activities and upheld an Ohio Board of Tax Appeals’ decision denying OCLC an exemption from property taxes. See OCLC Online Computer Library Center, Inc. v. Kinney, 11 Ohio St. 3d 198, 464 N.E. 2d 572 (1984), 1984 Ohio LEXIS 1136.... Apparently, OCLC had the political clout in Ohio to have the Supreme Court’s decision nullified legislatively.

OCLC, in its response, gets in its two cents as well (emphasis added): ((SkyRiver Technology Solutions, LLC et al v. OCLC Online Computer Library Center, Inc., Document #25, page 11 lines 6 through 24))

OCLC established in its Motion that Ohio courts have a stronger interest in the issues raised by this lawsuit because, among other concerns, Plaintiffs have raised allegations that OCLC is improperly exercising its non-profit status. In response, Plaintiffs cite a 1984 Ohio Supreme Court case which found that OCLC was not exempt from real estate and property tax under then-enacted Ohio law. In reality, as a result of that lawsuit, the Ohio Legislature demonstrated that it was concerned with OCLC’s non-profit mission by creating for OCLC a statutory exemption from the property tax requirements. Indeed, the language of the statute reinforces OCLC’s argument that the State of Ohio has a particularly strong interest in OCLC’s tax-exempt mission.... Plaintiffs’ unsupported claim that the Ohio Legislature acted because OCLC improperly exercised “political clout in Ohio” is an unwarranted attack on the Ohio Legislature and its members. Surely, Plaintiffs are not suggesting that the judges in the Southern District of Ohio would be unable to adjudicate fairly a lawsuit brought by an out-of-state litigant, or that they would improperly favor OCLC.

A Brief History of the State Support of Libraries in Ohio

This history comes from Ohio's Future: Funding History of Ohio's Public Libraries, a publication of the Ohio Library Council. It provides the backstory to the 1983 funding model change that added a section to the Ohio Revised Code that effectively exempted OCLC from state taxes.

State Support

Beginning in 1933, public libraries in Ohio were supported almost entirely from revenues from the intangible personal property tax. This was a tax levied on individuals’ holdings of intangible assets – mainly stocks and bonds. Though the tax was state-imposed and applied uniformly throughout Ohio, it was collected locally. The revenue remained in the county of origin, where it was distributed to library systems in that county in accordance with “need.”

This system of library finance, unique in the United States, had several results. Some counties, because of large holdings of taxable intangible property or vigorous local tax enforcement efforts, realized great revenue. Others received very little. By the late 1960s some of Ohio’s largest library systems were justly renowned for the strength of their collections, the breadth and variety of services offered, and their qualified professional staffs. However, there were many areas of Ohio where public library service was virtually nonexistent. In Adams County, with a 1970 population of about 19,000, the public library consisted of two small local libraries that received a total of only $19,100.

Library and Local Government Support Fund

In 1983, the Ohio General Assembly repealed the intangible tax based on recommendations from a bi-partisan study of the state’s entire tax system.
Governor Richard Celeste then created the Public Library Financing and Support Committee, consisting of members of the House and Senate, public library directors, the dean of the Kent State University School of Library Science, teachers, and financial experts, to determine how the state should replace the intangible tax funding for public libraries.

This committee determined that the loss libraries experienced through the repeal of the intangible tax was equal to 6.3% of Ohio’s personal income tax revenue. Therefore, 6.3% of Ohio’s personal income tax receipts were earmarked for the [Library and Local Government Support Fund].

The Public Library Finance and Support Committee set forth two goals for the state’s library fund distribution plan: 1. To preserve excellence in existing service, and 2. To improve library service in under funded and underserved areas. To accomplish these goals, the distribution formula divides the LLGSF among all of the state’s 88 counties in two ways. First, the formula guarantees each county the amount of revenue received from the fund in the preceding year plus an adjustment for inflation. This part of the distribution is called the “guarantee share.” Second, if any money remains in the fund after paying each county’s guarantee share, then that remainder is distributed according to an “equalization ration.” The equalization aspect of the formula distributes the excess over the guarantee in inverse proportion to per capita funding levels among the counties – those counties which received less per capita in the guarantee share, receive more in the equalization share. Thus, over time, the distribution to counties begins to balance.

The text was modified to update a link from http://www.irs.gov/charities/article/0,,id=181089,00.html to http://www.irs.gov/instructions/i990/index.html on November 19th, 2012.