"What is the Difference between a Taxidermist and a Tax Collector? The Taxidermist Takes Only Your Skin."

By William W. Abbott

Well, Mark Twain got that right. Beginning with the voter approval in 1978 of Proposition 13, California voters and public agencies have been at odds with each other over local government revenue strategies.  The dilemma for local government being of course, that residents demand high level of services but expect someone else to pay for it. Walking the fine line between service delivery and voter enacted limitations on revenue streams, local agencies continuously explore and implement new strategies to capture new revenue streams, and over time, the trend has been to link charges to services provided. In the most recent levy case, the City of San Diego attempted to forge new territory by charging a processing fee for the purpose of offsetting costs associated with sending tax bills. In other words, a processing fee imposed on top of, and for the purpose of, collecting a general tax collected from property owners.

In terms of history, the City in 1990 enacted a tax for general revenue purposes, applicable to the owners of rental housing. In 2004, tax revenues generated 11 million to the general fund. In 2004, City staff proposed the adoption of a processing fee. The fee was intended to offset the administrative cost of collecting the tax (staff, printing, computer, overhead, postage).  The same staff also provided services to members of the public whether or not they were payers of the residential tax. The proposed levy ($25.00) was calculated by taking total program costs and dividing by the total number of applications for new business licenses, renewals, and rental unit business tax payees.

A property owner received the increased charge (underlying tax plus a labeled “processing fee” of $25.00) and filed a claim against the City, subsequently denied by the City. The City’s rejection letter indicated that the supplemental fee was for services provided to, and regulatory activities related to businesses operating in the City. The property owner filed suit. The City’s basic position was that the levy was a reasonable charge for a service or regulatory activity, and in response to cross summary judgment motions, the trial court ruled for the City in response to the its motion, and declined to rule on the taxpayer’s motion.  The appellate court however, reversed the trial court decision.

In reviewing a successful judgment motion, the appellate court reviews evidence offered by the losing party liberally, while at the same time, strictly scrutinizing the evidence of the prevailing party. On appeal, the court first determined that the levy was a tax. The original enactment did not provide any guidance that the levy was to fund any regulatory activity or for any service provided, and it was undisputed that the levy was to be deposited in the general fund for general governmental purposes. Although the City argued that the taxpayers received particular benefits in the form of courtesy tax notices, the court declined to recognize this as a particular benefit. In response to the City’s argument that the levy was for a legitimate regulatory activity, the court concluded that any regulatory benefits were merely incidental to the primary purpose (generation of tax  revenue). Accordingly, the levy was a tax for purposes of Proposition 218. The court then turned to the related question of which of the simple majority (general tax) or the two-thirds (special tax) voter approval requirements applied. Although funds were calculated to offset the costs of a specific city activity (collecting the underlying tax), the appellate court determined that the levy, deposited in the general fund, was collected for general revenue purposes, and necessitated voter approval. The court then declared the tax void under Proposition 218 and remanded the matter back to the trial court for further proceedings to determine the appropriate remedy. Weisblat v. City of San Diego 176 Cal. App. 4th 1022; 2009 Cal. App. LEXIS 1360.

Local governments have creatively pushed the revenue envelope following the various voter enacted tax limitation measures and whatever tools they currently posses are pretty much what they have to work with. Coupled with the State unilaterally borrowing heavily from local governments in the 2009-2010 budget, the perfect storm over delivery of local services is hovering off the coast, ready for landfall.

William W. Abbott is a partner at Abbott & Kindermann, LLP.  For questions relating to this article or any other California land use, real estate, environmental and/or planning issues contact Abbott & Kindermann, LLP at (916) 456-9595.

The information presented in this article should not be construed to be formal legal advice by Abbott & Kindermann, LLP, nor the formation of a lawyer/client relationship. Because of the changing nature of this area of the law and the importance of individual facts, readers are encouraged to seek independent counsel for advice regarding their individual legal issues.

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