SD Tax-Processing 'Fee' Declared Illegal
A fee that the City of San Diego levied on businesses and landlords for processing their taxes has been declared illegal by the Fourth District Court of Appeal. The court ruled that the fee amounted to a general purpose tax that should have been submitted to voters for approval.
The decision marks another loss for local government in the continuing litigation over the reach of Proposition 13 and its progeny Proposition 218, which contains voter-approval requirements for taxes, as well as for property-based assessments and fees.
San Diego contended its levy was a fee for service and thus not subject to Propositions 13 or 218. But a unanimous three-judge panel ruled that it was a "means for collecting tax payments." The court also rejected the city's argument that the fee was "regulatory" and thus exempt from Proposition 218.
San Diego city officials appear ready to ask the state Supreme Court to review the decision, which both sides said could have significant statewide ramifications. If the high court does not accept the case, the attorney for two landlords who filed the lawsuit said he would demand that the city return the fee revenue, which totaled more than $14 million.
"The city has to pay it all back, and pay it all back with interest," attorney Edward Teyssier said. "There's a strong public policy issue. You should return the money."
San Diego has long levied a business tax, and in 1990, the city extended it to owners of rental housing. The tax generated approximately $13.5 million during the 2008-09 fiscal year.
Faced with a budget shortfall in 2004, the City Council approved a $25 "business tax and rental unit tax processing fee" for the 139,000 businesses and landlords subject to the tax. The city said the fee would recover the $3.5 million in costs associated with processing applications and renewals for business tax and rental unit tax certificates. In 2007, the city cut the fee to $15.
Sidney Weisblat, who owns a rental condo, and Kenneth Ledgerwood, who owns two rental houses, sued the city in June 2005 to end the fee, contending that it amounted to a tax in violation of Propositions 13 and 218. San Diego County Superior Court Judge Charles Hayes ruled against them, but the Fourth District, Division One, overturned the decision.
In its ruling, the appellate court detailed the differences between special taxes, general taxes and fees. Special taxes are levied for a specific purpose and must be approved by two-thirds of voters. General taxes serve general governmental purposes and require only the approval of a majority of voters. Assessments, fees and charges imposed "as an incident of property ownership" and user fees or charges for a "property related service" are subject to Proposition 218. These charges require either majority approval of the property owners or two-thirds approval of the electorate in the affected area. User fees, regulatory fees and development impact fees are not subject to voter or property owner approval.
To help decide where the San Diego charge fell on this legal spectrum, the court cited the state Supreme Court's "primary purpose" test adopted in Sinclair Paint Co. v. State Board of Equalization, (1997) 15 Cal.4th 866: "If 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."
The city contended that the processing charge was a regulatory or user fee because it benefited those who paid it by funding courtesy billing notices. But the appellate panel said there was no evidence that "the purpose of the levy is to fund any regulatory activity or provide any municipal services beyond those involved in recovering the costs associated with processing the business tax and RUBT [rental unit business tax] certificate applications and renewals."
Writing for the court, Justice Gilbert Nares said, "The city cites no authority, and we are aware of none, to support the city's novel position that a levy ‘courtesy billing notice' is a ‘specific benefit conferred' within the meaning of the Sinclair Paint guidelines that renders a local government levy a fee, and not a tax subject to constitutionally required voter approval limitations."
The court then considered whether the fee is a general tax subject to majority vote, or a special tax needing two-thirds approval. While it determined that the levy is a hybrid, the panel ruled it should be treated like a general tax because its practical effect "is an increase in the business tax and therefore an increase in a general tax."
City Attorney Jan Goldsmith has asserted that the decision affects only the landlord fee – an interpretation attorney Teyssier dismisses. For purposes here, business owners and landlords are not separate classes, he said.
"I've got landlords for clients, and I've got business owners for clients; you can guess what I might do next," Teyssier said. "We'll decide what to do later on based on what the city does."
Meanwhile, the Howard Jarvis Taxpayers Association, which authored Proposition 218, has warned that it may use the decision to fight similar tax-processing fees in other jurisdictions.
Weisblat v. City of San Diego, No. D052787, 2009 DJDAR 12319. Filed August 18, 2009.
For Weisblat: Edward Teyssier, (619) 474-7500.
For the city: Joe Cordileone, city attorney's office, (619) 533-5854.