HOW DO YOU DETERMINE THE DIFFERENCE BETWEEN A TAX AND FEE?

One of the most difficult and   complex decisions  facing local government officials is determining whether or not a charge is a tax and a fee. The tax/fee question has bedeviled  local government  officials for years leading at times to what would seem to be a  life and death struggle for financial solvency of the political subdivision.  This decision is important because if the charge is a new tax or an increase in an existing tax it must first be approved by the voters as required by article X, section 22 of the Missouri Constitution, otherwise the tax is invalid leading  to  dire consequences, like what recently happened in  Zweig, et al., v. The Metropolitan St. Louis Sewer District.

In the Zweig case   the Missouri Supreme Court invalidated a storm water impervious use charge holding that this charge was a tax and was invalid because it had not been approved by the voters. This decision left the St. Louis Metropolitan Sewer District with a shortfall of  billions of dollars (unless the voters approve additional revenues) in complying with a multibillion dollar consent decree with the State of Missouri and the EPA, as well  a  5.4 million dollar plus  award of attorney fees. If that does not take your breath away and bring you to your financial knees I do not know what it takes.

Considering the difficulties political subdivisions were having in determining if a charge was a fee or a tax the Missouri Supreme Court went to great lengths to provide a clear analysis for local government in  the  Zweig decision stating in so many words that political subdivisions were not hearing the the Court’s unambiguous message Prior to Zweig, most  local government lawyers thought that the test established by the Missouri Supreme was difficult to apply and was flawed creating great uncertainty in advising local governmental officials as to whether or not  a charge was a fee or a tax. 

The Court in Zweig  tells us that local government officials have over analyzed the problem and have gotten lost in the forest by applying the five-part test Keller test as a “divining rod” like it was a math problem where you simply added up the five-part Keller factors  instead of using the five-part Keller test along with other factors to help determine if a charge is a tax or fee including cases prior to the Hancock Amendment. The Court also emphasized that local government officials were structuring the charge to meet the five-part Keller test in order to reach a result instead of simply applying the five-part Keller test and other factors losing sight of the fact that case law well before the adoption of the Hancock Amendment defined what constituted a tax.  

The Missouri Supreme Court in Zweig, held that the impervious stormwater charge made by the Metropolitan St. Louis Sewer District ( MSD) was a tax.  It is difficult to find anything positive for local government in this decision other than analytical framework, which the court carefully lays out in its 52 page opinion how to determine whether or not a charge is a fee or a tax under article 10, Section 22 of the Missouri Constitution. 

Facts and Procedure: MSD imposed a stormwater user charge generally based upon the amount of impervious surface that was on the property against certain persons within the District. Plaintiffs, (Ratepayers) on behalf of themselves and a class of similarly situated ratepayers sued MSD seeking declaratory, injunctive, and monetary remedies on the ground that MSD violated article X, section 22(a) of the Missouri Constitution when it implemented its stormwater user charge without prior voter approval.

The trial court declared MSD’s action unconstitutional, enjoined future collection of the charge, and ordered MSD to pay the ratepayers’ attorneys’ fees and other expenses. The trial court, however, refused to order MSD to pay damages or refund charges already collected. MSD appealed the trial court’s decision on Ratepayers’ constitutional claim and the award of Ratepayers’ attorneys’ fees and expenses. Ratepayers cross-appealed, claiming that the trial court erred in refusing to enter a money judgment against MSD for the amounts already collected. The Missouri Supreme Court affirmed the trial court’s judgment in all respects.

Analysis: MSD characterized the stormwater charge as a user fee paid to ensure the ”continuous and ongoing” availability of the storm water drainage system rain or shine. Despite this characterization the basic flaw in MSD’s argument was that a user fee must be charged in exchange for, based upon, an individuals use of the service. “A tax need not be tied to the payer’s use of a political subdivision service, but a user fee must be.”

Before launching into the five-part Keller test the court takes apart Keller going back to basics by focusing on the key distinction from which the holding in Keller is based.  What article 10, section 22 prohibits without a vote of the people is a political subdivision from levying new or increased taxes. A levy is “… to impose or collect (as a tax or tribute) by legal process or by authority.” A tax creates an obligation to pay that is not contingent upon the actual use of the political subdivisions service. In the Keller case the ambulance district was not levying a tax because it was just increasing the price it could charge a patient for using its services. Furthermore, the five criterion in Keller are only intended to adopt the pre-Hancock test for a tax in a new constitutional context, not replace it completely. In Arbor Inv. Company v. City of Hermann the court emphasized that the “… Keller criteria are to be used only as reliable indicators, not constitutional divining rods.” When determining whether or not a charge is a fee or tax first look to Leggett, to determine if the charge was a tax or fee prior to Keller.

In applying the Keller criterion the court starts with Keller criterion No. 4What services does MSD provide in exchange for the fee? MSD took the position that the users were paying for the availability of the stormwater system. The court concludes that MSD did not impose a charge in exchange for the individual’s actual use of those services making the charge more like a tax.

Keller criterion No. 2:  Who pays – owners or users? MSD tied the payment for the stormwater charge to the ownership of the land thereby assuring that overtime the charge would be paid regardless of any individual use of the stormwater services. This made the charge more like a tax then a fee.

Keller criterion No. 1: When is it paid– Regular or after use? The charge is paid periodically for the use of the storm water system based on ownership of the land regardless of whether or not the services are used indicating that the political subdivision had levied a tax.  There is no way to tell when such services are actually use weighing heavily in favor that MSD was not imposing a stormwater charge as a user fee.

Keller criterion No. 3: How much to pay–fixed amount or based on usage? MSD charges based on each landowners contribution to the overall need not for stormwater services, not the owners actual use of storm water services. Because there is no individual user availability for such services any possibility that the stormwater charge is a valid user fee is precluded.

Keller criterion No. 5: Is the service historically and exclusively governmental? There was no evidence that any private entity provides (or ever has provided) availability of a stormwater system for individual landowners as MSD claims to do; Therefore, the Application of the fifth Keller criterion suggests that MSD was imposing a tax not really setting a price for the storm water user charge.

Additional factors:  The court considered the lien for nonpayment as a factor that made the charge a tax. In addition, the remedy of shutting off water utilities was not related in any way to be stormwater charge; therefore the charge looked like a tax.

Refunds. The court affirmed the trial courts ruling that payment of the stormwater taxes  were not refundable. This is consistent with the general rule that a taxpayer is not entitled to a refund of illegal taxes unless a law authorizes the refund. There is no refund provision in section 22(a) of the Hancock amendment.

Attorney fees. The court affirmed the trial court’s decision allowing for attorneys fees in the amount of $4.3 million (includes a multiplier of 2) and an additional amount of $470,000 in expenses based upon an earlier decision. With respect to the attorneys fees the court noted that the fees were regrettably since the parties could have easily stipulated to most of the facts thereby avoiding expensive expert witnesses and prolonged litigation.

The opinion of the court provides a well-defined process for analyzing whether or not a charge is a fee or a tax helping us advise local governmental agencies. Considering the results in Zweig it behoves local government officials to focus in its analysis on the key cases cited by the Supreme Court (Leggett, Keller, Hermann and Zweig) when determining if a charge is a fee or a tax.

Despite the harsh criticism by the Court in Zweig  many states have treated impervious storm water runoff charges as fees using what is referred to as the “utility model.” This approach makes sense but unfortunately it just does not work under the Hancock Amendment to the Missouri Constitution. 

Howard Wright @ 2013

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