Oct 20 2009
Difference between a tax and a fee in California
Over the years, much has been made about the difference between a tax and a fee in California. Sometimes proposals call things “fees” so they don’t have to meet the 2/3 vote requirement of taxes - even if it is a tax.
The difference, in California, can be quite complex. However, one of the quick ways to see if there might be a problem is to ask the following questions of the “fee”:
1) Is the primary purpose of the “fee” to raise revenues for the General Fund? If the answer is yes, then the “fee” is closer to a tax and will be subjected to closer scrutiny in the state courts (when and if a lawsuit is brought).
2) Do the revenues of the “fee” go towards benefiting those who are paying the “fee?” If the answer is yes, then it is likely a real “fee” rather than a tax. There must be a nexus between what the fee is going to pay for, and the benefit those who pay the fee will receive.
Here is some other help to distinguish between a tax and a fee:
One of the main differences between a tax and a fee is that a tax can be spent for general purposes, whereas a fee must be spent to directly benefit those who are paying the fee. There must be a “sufficient” nexus between the benefit provided to the people and the fee being paid. Who decides what is sufficient - the courts of course.
Here is an example: Last year the Governor tried to impose a statewide “fee” on homeowners to cover the rising costs of firefighting for state firefighters. It was deemed a tax because it was going to be assessed on homeowners who are not protected by the state firefighters (basically anyone in suburban or urban areas where they have their own firefighters). Although the case was made that the state firefighters would come in to assist in the case of a fire, it wasn’t deemed a “sufficient” nexus to be called a fee, and so the proposal was dropped.
Here’s a quick legal brief on the difference between a tax and a fee.
In 1996, California voters passed Proposition 218, adding Articles XIII C and XIII D to the California Constitution. These provisions define the terms “general tax” and “special tax.” See Cal. Const. art. XIII C, § 1 (<strong>defining “general tax” as “any tax imposed for general governmental purposes” and “special tax” as “any tax imposed for specific purposes, including a tax imposed for specific purposes, which is placed into a general fund”).Local government general taxes may not be imposed, extended, or increased without approval by a majority of the electorate. See Cal. Const. art. XIII C, § 2(b)-(c). Fees (defined as anything other than a tax or ad valorem charge) may be imposed by local governments without voter approval as an outgrowth of inherent health-safety-welfare regulatory power. See Cal. Const. art. XIII D § 4. See also Bay Area Cellular Telephone Co. v. City of Union City, (2008) 162 Cal. App.4th 686, 694
To effectuate Proposition 218’s purpose of limiting tax increases disguised as “fee” increases, see Historical Notes, 2A West’s Ann. Cal. Const. (2004 supp.) foll. art. XIIIC, § 1 (”[L]ocal governments have subjected taxpayers to excessive tax, assessment, fee and charge increases that not only frustrate the purposes of voter approval for tax increases, but also threaten the economic security of all Californians and the California economy itself.”), a strong constitutional and judicial framework distinguishing between general taxes, special taxes, and fees has developed. “In general, taxes are imposed for revenue purposes, rather than in return for a specific benefit conferred or privilege granted.”Sinclair Paint Co. v. State Bd. of Equalization (1997) 15 Cal.4th 866, 874, 937 P.2d 1350.
The tax/fee distinction is important nationally not only because of taxpayer protections in state constitutions like California’s, but also for delineating the federal/state balance in the Tax Injunction Act. California’s framework, generally describing taxes (both general and specific) as assessments imposed with the purpose of non-incidentally raising revenue for general spending, and fees as assessments imposed with the purpose of recovering some or all of the cost of providing regulation or a tangible service to the person paying it, is echoed by other courts around the country.The tax/fee distinction is important not only for taxpayer protections in state constitutions but also for delineating the federal-state balance such as with the Tax Injunction Act. See also Massachusetts v. United States, 435 U.S. 444, 466-67 (1978) (distinguishing a fee from a tax where the charge is “based on a fair approximation of use of the system, and [is] structured to produce revenues that will not exceed the total cost . . . of the benefits to be supplied. . . .”); Valero Terrestrial Corp. v. Caffrey, 205 F.3d 130, 134 (4th Cir. 2000) (applying San Juan Cellular to determine if a charge “qualifies” as a tax, or otherwise it is a fee); Neinast v. Texas, 217 F.3d 275 (5th Cir. 2000) (applying San Juan Cellular); Hedgepeth v. Tennessee, 215 F.3d 608, 612 (6th Cir. 2000) (describing San Juan Cellular as the “leading decision” used for “the definition of the term ‘tax’”); Bidart Bros. v. California Apple Comm’n, 73 F.3d 925, 931 (9th Cir. 1996) (applying San Juan Cellular test to “determin[e] whether an assessment is a tax”); Chicago and Nw. Transp. Co. v. Webster Co. Bd. of Supervisors, 71 F.3d 265, 267 (8th Cir. 1995) (”[A] government levy is a tax if it raises revenue to spend for the general public welfare.”); Brock v. WMATA, 796 F.2d 481, 488 (D.C. Cir. 1986) (”A levy is properly defined as a ‘tax’ . . . when its principal purpose is to raise revenues.”); Time Warner Entertainment-Advance/Newhouse P’ship v. City of Lincoln, 360 F. Supp.2d 1012, 1016-17 (D. Neb. 2005) (stating that the San Juan Cellular test faithfully applies Blackstone’s description of taxation); Nat’l R.R. Passenger Corp. v. City of New York, 695 F. Supp. 1570, 1575 (S.D.N.Y. 1988) (”A tax need not have any relation to governmental costs. . . . A user fee, on the other hand, must be no greater than the government’s costs.”); Roger D. Colton & Michael F. Sheehan, Raising Local Government Revenue Through Utility Franchise Charges: If the Fee Fits, Foot It, 21 Urb. Law. 55, 63 (1989) (”If the primary intent is to raise revenues, a measure is more likely to be considered a ‘tax.’ If the level of the fee is totally divorced from any cost-basis, it is more likely to be deemed a ‘tax.”)
