Franchise Fee Is A Tax

A monthly feature, exclusive to NCRA News, from NCRA general counsel and board member John Moore, concerning recent legal decisions relating in some manner to Zero Waste.

By John D. Moore, NCRA Vice President and Legal Counsel, Henn, Etzel & Moore, Inc.
On February 26, 2015, the California Court of Appeal for the Second Appellate District, entered into the murky fray of Proposition 218 interpretation and attempted to clarify when a franchise fee is a tax requiring pre-approval by the electorate. Though the case arose in the context of an electrical service utility, the Court’s analysis might well apply to other municipal franchises, such as solid waste.

In Jacks v. City of Santa Barbara, the City, with PUC approval, imposed a 1% (of gross receipts) surcharge on the utility, Southern California Edison, to be collected by SCE from the ratepayers, making SCE a pass-through of the surcharge. A taxpayer group challenged this surcharge under the CA Constitution provision known as Proposition 218. Proposition 218, in short, is an outgrowth of Proposition 13’s limitation on government taxation power and requires voter approval before any new tax can be imposed.

As the Court in Jacks noted, Proposition 218 prohibits local governments from imposing “taxes” without voter approval but does not define what “taxes” means. According to the California Supreme Court in Sinclair Paint v. State Board of Equalization, “The term “has no fixed meaning, and . . . the distinction between taxes and fees is frequently ‘blurred,’ taking on different meanings in different contexts… In general, taxes are imposed for revenue purposes, rather than in return for a specific benefit conferred or privilege granted.”
Jacks also noted that the state high court, in contrast, has defined “franchise fee” since 1922 as a “charge which the holder of the franchise undertakes to pay as part of the consideration for the privilege of using the avenues and highways occupied by the public utility.”

Jacks took a very literal reading of this 1922 definition to decide that Santa Barbara’s surcharge was a tax and not a franchise fee because, the …”primary purpose is for the City to raise revenue from electricity users for general spending purposes rather than for SCE to obtain the right of way to provide electricity. This constitutes a tax under Proposition 218 and is subject to approval by the electorate.

In reaching this conclusion, Jacks again echoed the state high court’s 1997 analysis in Sinclair Paint, that if it quacks like a duck, it’s a duck: “if revenue is the primary purpose, and [compensation for the franchise] is merely incidental, the imposition is a tax, but if [compensation for the franchise] is the primary purpose, the mere fact that revenue is also obtained does not make the imposition a tax.”

The Sinclair Paint Court also stated that the definition of “taxes”, ” ‘does not embrace fees charged in connection with regulatory activities which fees do not exceed the reasonable cost of providing services necessary to the activity for which the fee is charged and which are not levied for unrelated revenue purposes.’

In the field of solid waste franchises, the Court of Appeal’s 1993 determination in City of Dublin v. County of Alameda, that Alameda County Measure D did not impose a tax, but was an enactment of regulatory power, has long held sway.

But the 1993 Measure D case was decided before Sinclair Paint and before the constitutional amendment of Proposition 218. In light of Jacks, local governments, franchised haulers, and ratepayers, may want to take another look at the applicability of Proposition 218 to solid waste franchise fees.