Labor & Employment Law

Financing government activities - is it a fee or a tax? -- The duck rule

In these times of financial difficulties administrators and legislators frequently attempt to devise alternative ways to increase revenue to support govenment activites. The follow item from the Administrative Law Professor Blog is instructive:

"An important rule of interpretation in administrative law is the 'duck rule' - if it walks like a duck and quacks like a duck, it's probably a duck. Abraham Lincoln reportedly explained a stronger version of this rule in his answer to the question, "If you call a dog's tail a leg, how many legs does a dog have? Four. Just because you call the tail a leg doesn't make it one."

"In Sheppard Mullin's Real Estate, Land Use and Environmental Law Blog, Jeffrey W. Forrest and David P. Lanferman describe a recent California decision illustrating this point in "Administrative Fee for Tax Collection is an Unconstitutional Hidden Tax"

"The issue was whether the City of San Diego?s ?Tax Collection Fee? charged to landowners to cover the expense of collecting and administering the City?s rental unit business tax was, in fact, a general tax.

"If it was a general tax, then the California Constitution required approval of a majority of qualified voters in the City, and it had never been submitted to the voters. Here's the rule:

In 1997, in an attempt to clarify the sometimes blurry distinction between a government ?fee? and a government ?tax,? the California Supreme Court explained that ?taxes are imposed for revenue purposes, rather than in return for a specific benefit conferred or a privilege granted.? ...

The court held that it was a general tax because the purpose of the Tax Collection Fee was not to provide a government service to landlords (such as building inspection), but rather to facilitate the City?s general tax collection efforts (processing rental tax applications, answering taxpayer questions, and generating and mailing out billing statements to collect the rental tax).

"The Court disagreed with three arguments put forward by the City:

First, the City claimed that the Tax Collection Fee afforded a specific benefit to landlords because it funded a courtesy billing notice that helped landlords avoid penalties for failure to timely register their rental businesses. The court disagreed finding that the central purpose of such notices was to facilitate collection of the rental unit business tax. Assisting landlords in avoiding penalties was only an incidental benefit. The court looked to the City?s resolution approving the Tax Collection Fee, which stated that its purpose was ?to recover costs associated with processing applications and renewals for [rental unit business tax certificates

"Second, the City claimed the Tax Collection Fee funded regulatory activities, noting the Supreme Court?s pronouncement that ?all regulatory fees are necessarily aimed at raising ?revenue? to defray the cost of the regulatory program in question, but that fact does not automatically render those fees ?taxes.?? ... However, the Court of Appeals disagreed, noting the Supreme Court?s ?primary purpose? test for determining whether a regulatory fee should be deemed a tax:

[I]f revenue is the primary purpose, and regulation is merely incidental, the imposition is a tax, but if regulation is the primary purpose, the mere fact that revenue is also obtained does not make the imposition a tax. ...

"Here, the court found that the City provided no details about how its services regulated the conduct of any person. Furthermore, the City staff report recommended the City Council adopt the fee ?as one of the solutions to offset the $17.3 million State budget reduction.? As such, the Court of Appeals found that the primary

"Ouch. The third argument referred to a statutory provision similar to the second argument and fell the same way. The authors offer a great conclusion:

To the extent local governments believe they are not collecting fees that fully recover the cost of services they provide to a discrete group, [this case] highlights the importance of identifying the primary purpose of imposing a fee, the specific benefit provided to the group, and some details on the group?s exact conduct the fee proposes to regulate. California?s courts are increasingly looking past the label given a fee or tax to determine the true nature of revenue-raising measures. Due to the fact that valid fees, special taxes or general taxes are each established through different procedures, understanding the nature of the revenue-raiser at the outset is critical. ... The pressure to raise revenue to cover budget gaps without evoking a new tax revolt is growing in these economic times, which creates a strong incentive to label every revenue increase a fee regardless of its true nature. Traps abound for unwary local governments and taxpayers alike.

"Thanks to Lexology for the pointer."

EMM

Full post as published by New York Public Personnel Law on September 17, 2009 (boomark / email).