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Those Circumstances Under Which a “Fee” Can Be Transformed Into a “Tax”

IVGID 101 Posted on by

An otherwise legitimate “fee” can be transformed into an impermissible special “tax”1 because

“The Legislature’s law-making authority is…not unlimited (and)…courts are obligated to enforce the limitations that the Constitution imposes upon legislative acts,”2

Here we examine the circumstances under which this transformation takes place.

The Way Within Which a Fee is Expended – Where Its Purpose is Primarily to Raise Revenue: A fee can be transformed into an impermissible special tax because of a change in the manner within which it is expended3. Therefore, where the primary purpose of a fee is to raise revenue rather than to recover the costs of providing the facility or service for which the fee is assessed4, it is transformed into a tax. For a more comprehensive discussion of this subject, the reader is referred to our What Exactly is a Fee discussion.

When a Monetary Exaction‘s “Purpose is (Expressly) to Raise Revenue:”5 for the financial support of government, and for all public needs8, it is a tax. Which explains why taxes typically “exceed…the value of the specific services for which (they are arguably) charged.”6

The Way Within Which Its Proceeds Are Expended: Given a fee must be “reasonably proportionate to the benefit received,”7 where the ordinance or resolution adopting the fee does not require that the funds generated from the fee be used for the service represented by payment, “leaving open the possibility that the charge could be used for general revenue raising purposes,” it must be held to be invalid8. For a more comprehensive discussion of this subject, the reader is referred to our Are The District’s RFF/BFF Really Fees discussion.

The Way Within Which a Fee is Expended – When it Exceeds The Reasonable Cost Government Incurs to Furnish The Special Service, Benefit, or Privilege For Which it is Charged: And given “a fee is not a revenue measure, but (rather) a means of compensating…government for the cost of offering and regulating the special service, benefit, or privilege9, [i]f the ‘fee’ unreasonably exceeds the value of the specific services for which it is charged10, as a contribution toward the cost of maintaining governmental functions, and where the special benefits derived from their performance are merged in(to) the general benefit,”8 “it will be held (to be) invalid” as “a tax.”9 Which explains why taxes typically “exceed…the value of the specific services for which (they are arguably) charged.”11

Moreover, even where only a portion of a “fee” represents more than the reasonable cost government incurs to furnish an alleged special service, benefit, or privilege, the entire amount will be held invalid as a tax. Because “a court cannot apportion the charge (n)or ascertain and allow (only) such portion as it may find reasonable.”12 Because determining what is a reasonable cost is a legislative function.

The Way Within Which a Fee is Expended – When it Pays For “a General Benefit to” Society As a Whole13: Because it is not “a (special) benefit (to) the (payor) not shared by other members of society.”14 This principle was discussed by the Washington Supreme Court in Okeson v. City of Seattle, 150 Wash.2d 540, 78 P.3d 1279, 1285 (2003) where the question presented was whether a charge assessed on landowners to provide and maintain street lighting represented “a tax or a fee to pay for those costs.” Notwithstanding money was being raised pursuant to a city’s permissible municipal police power15 (i.e., lighting streets), the charge was declared to be an invalid tax because

“There was no relationship between the fee imposed on City Light customers and the streetlight service they received or the burden that they produced.” In other words, no “special benefit” was being furnished because those who were charged were not the only persons benefited thereby16.

Similarly, in Lane v. City of Seattle, 164 Wash.2d 875, 194 P.3d 977, 978-79 (2008) the Washington Supreme Court addressed a fee for “providing fire hydrants…a(nother) government responsibility…which a government (rather than its utility ratepayers) must pay.”

“Here, the purpose of charging ratepayers a hydrant charge (wa)s…to increase revenue for the city and not to regulate hydrants (n)or water usage, indicating a tax. (Although) the money goes to a hydrant fund, making it more like a fee…ratepayers pay the same fixed hydrant cost whether they use hydrants or not, indicating a tax. All benefit by having water available to put out fires17…(And) for purposes of deciding a tax or fee, hydrants are very much like streetlights (see Okeson, supra, at 150 Wash.2d 552. Therefore,) as in Okeson, the charge here is a tax.”18

The Way Within Which a Fee is Adopted – Deprivation of Due Process: Given courts are obligated to enforce the limitations that the Constitution imposes upon legislative acts2, fees collected in violation of the Constitution are transformed into a tax19. Given 1 of the Fourteenth Amendment to the United States Constitution and Art. I, ¶8(2) of the Nevada Constitution both guarantee that neither the State nor any Nevada local government shall deprive any “person…of life, liberty, or property20 without due process of law,”21 where fees are involuntarily collected without providing due process22, this becomes another example where they are transformed into impermissible special taxes23. For a more comprehensive discussion of this subject, the reader is referred to our Are The District’s RFF/BFF Valid Because Those Whose Properties Are Assessed Are Deprived of Due Process discussion.

The Way Within Which a Fee is Adopted – Via a Local or Special Law or One of Non–Uniform Application Throughout The State: Given courts are obligated to enforce the limitations that the Constitution imposes upon legislative acts2, fees collected in violation of the Constitution are transformed into a tax where the equivalent of a local or special law, or one of non-uniform application throughout the State24. Therefore “circumstances…of statewide concern…addressed through legislation that does not comport with Art. IV, §21 (of the Constitution)’s local and special law proscription” are in violation of the Nevada Constitution. For a more comprehensive discussion of this subject, the reader is referred to our Are The District’s RFF/BFF Taxes Because They’re The Product of a Local or Special Law discussion.

The Way Within Which a Fee it is Collected – When It‘s The Product of a Nonexchange Transaction: Because payment entitles the payor to receive nothing of value in consideration of payment, except the governmental rights enjoyed by all citizens, according to International Public Sector Accounting Standard (“IPSAS“) No. 23, Revenue From Non-Exchange Transactions and our What Are Our RFF/BFF According to Us discussion, the proceeds of nonexchange transactions are taxes. For a more comprehensive discussion of this subject, the reader is referred to our Distinction Between Exchange/Exchange-Like And Nonexchange Transactions discussion.

The Way Within Which it is Financially Reported: Such as when enterprise activities are reported in special revenue funds. Because special revenue Funds are reserved for the financial reporting of the proceeds of restricted or committed revenue sources for specified purposes. For a more comprehensive discussion of this subject, the reader is referred to our Are The District’s RFF/BFF Taxes Because Their Financial Reporting Takes Place in Special Revenue Funds discussion.

And now you know!

  1. See Clean Water Coalition v. The M Resort, LLC, 127 Nev. 301, 318, 255 P. 3d 247 (2011); Southern Nevada Life v. City of Las Vegas, 74 Nev. 163, 166, 325 P.2d 757, 758 (1958); Eastern Diversified v. Montgomery County, 319 Md. 45, 570 A.2d 850, 854 (1990); Hillis Homes, Inc. v. Snohomish County, 97 Wash. 2d 804, 650 P.2d 193, 195 (1982).
  2. See Clean Water Coalition, supra, at 127 Nev. 309.
  3. See Clean Water Coalition, supra, at 127 Nev. 316-318.
  4. See Rizzo v. City of Philadelphia, 668 A.2d 236, 238 (Pa. Commw. Ct. 1995).
  5. See Clean Water Coalition, supra, at 127 Nev. 315.
  6. See Executive Aircraft Consulting, supra, at 845 P.2d 62 quoting National Cable Television Ass’n, supra, at 554 F.2d 1106.
  7. See Clean Water Coalition, supra, at 127 Nev. 315; City of Madera v. Black, 181 Cal. 306, 313, 184 P. 397 (1919).
  8. See Executive Aircraft Consulting, Inc. v. City of Newton, 252 Kan. 421, 426, 845 P.2d 57 (1993) citing National Cable Television Ass’n, Inc. v. F.C.C., 554 F.2d 1094, 1106 (D.C.Cir. 1976)].
  9. See Executive Aircraft Consulting, supra, at 252 Kan. 427.
  10. Id., at 252 Kan. 426 (quoting National Cable Television, supra, at 554 F.2d 1106).
  11. See Executive Aircraft Consulting, Id.
  12. See City of Madera, supra, at 181 Cal. 315.
  13. Rather than just those who are assessed [see Hawaii Insurers Council, supra, at 120 Haw. 60, 201 P.3d 582; Clean Water Coalition, supra, at 127 Nev. 318].
  14. See National Cable Television, supra, at 415 U.S. 340-41.
  15. The health, safety and general welfare of Seattle’s residents [see Berman v. Parker, 348 U.S. 26, 32, 75 S.Ct. 98 (1954)].
  16. Although a “few specially benefited should not be subsidized by the general public” [see Silicon Valley Taxpayers’ Ass’n. v. Santa Clara County Open Space Authority, 44 Cal.4th 431, 455, 187 P.3d 37 (2008)], those few should not be required to pay for benefits to society as a whole. Or as stated a bit differently, “[i]f everything is special, then nothing is special” [Ventura Group Ventures, Inc. v. Ventura Port Dist., 24 Cal.4th 1089, 1107, 16 P.3d 717 (2001)].
  17. In other words, no “special benefit” was furnished because those who were charged were not the only persons benefited thereby.
  18. Lane, supra, at 194 P.3d 980.
  19. See Clean Water Coalition, supra, at 127 Nev. 320.
  20. In Sniadach v. Family Finance Corp., 395 U.S. 337, 339-42, 89 S.Ct. 1820 (1969) the U.S. Supreme Court ruled that money (i.e., wages) is property for purposes of the Fourteenth Amendment.
  21. “Wisconsin(‘s) garnishment procedure violated that due process…in that notice and an opportunity to be heard (we)re not given before the in rem seizure of…wages” (see Sniadach, Id.).
  22. “Following fair legal procedures…includ(ing the) giving (of) notice, a chance to respond, and a neutral decision-maker (usually a judge)” (go to https://act.represent.us/sign/due-process-explained/?source=go-ad-gen-20241212&utm_source=go&utm_medium=ad&utm_campaign=gen&utm_content=20241212&utm_term=&gad_source=1&gad_campaignid=22025691781&gbraid=0AAAAADhg-cCp6SxpQL4gtfdMZfHF69MoC&gclid=CjwKCAjwhqfPBhBWEiwAZo196pGIKrbcUT0mAEqRHWsZGTApnSDraTomttY7rfKbK0Vz8hsFmNjHghoCMeoQAvD_BwE).
  23. See Clean Water Coalition, supra, at 127 Nev. 316-318.
  24. “While the fees were collected as user fees, when the(y were)…transferred to the State’s general fund for unrestricted general use, they were transformed into a local and special tax” [see Clean Water Coalition, supra, at 127 Nev. 318].

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