Stormwater Charges A Fee or a Tax And Does It Matter
One of the most popular refrains in the chorus of stormwater-related customer inquiries is "I do not have stormwater service. Why do I have to pay for it?" Customers state they do not have any storm sewers in front of their property, stormwater does not drain off their property, or their downspouts are not tied to curb outlets that in turn lead to catch basins and storm sewers.
In developing a stormwater utility, it seems prudent to anticipate such inquiries and script a suitable response. Customer service is the essence of public service, so shaping a policy that helps people understand the benefit of paying the stormwater charge is a pragmatic approach to avoiding disgruntled customers. Furthermore, employee morale likely is enhanced through the presentation of clear policies. And finally the legitimacy of the institution is preserved.
Arguably, the level of resistance a new utility is likely to face is related to whether customers agree with the reasons for the charges in the first place. Resistance also arguably is related to how customers perceive the charge. So what exactly is a stormwater charge? Is it a fee? Is it a tax? And how should it be presented to the public?
Court stances have been split on this issue. Some say stormwater charges are fees; others say taxes. This column outlines the dominant arguments attached to each perspective and what various courts have said on the matter.
One might ask what difference it makes how charges are classified. Whether it is a fee or a tax, the money collected will be dedicated to providing needed service to the public. But characterization does matter. If stormwater charges are considered a tax, there might be state constitutional requirements governing how the charges can be assessed. Successful stormwater-utility implementation might depend on whether authority to implement is governed by a majority of voters or a majority of city council members. So classification can be critical. Just as important is that characterizing the charge as a tax or a fee might affect the level of revenue generated. Some properties are tax-exempt, but if the charge is characterized as a fee, these properties would contribute a share to the overall revenue picture.
What are the differences between the two perspectives? Generally speaking, the National Resources Defense Council (NRDC) review of state laws highlights common factors among the states. First, the charges "are intended to be and should be clearly described as a charge for a particular service"; second, users should receive some direct or indirect benefit from the service; and third, fees "should apply on the basis of contribution to the problem" the service is intended to address (NRDC, 1999).
From an overview of state court cases, clearly there is not one distinctive means by which to characterize stormwater charges. What is an important factor in one community is not the same in another. As the NRDC report points out, "A court in Oregon, in deciding that a storm drainage utility charge was not a tax, noted that the fees in question were not being levied exclusively against property owners" (Roseburg School District v. City of Roseburg, 1993).
In another example, a court in Michigan decided the distinction between a fee and a tax should be based on the following criteria:
- The user charges must serve a regulatory purpose rather than a revenue-raising purpose.
- The user charges must be proportionate to the costs of providing the service.
- The charges must be voluntary (Bolt v. City of Lansing, 1998).
The Michigan court placed a great deal of emphasis on voluntariness. Whether the stormwater charges were considered a fee or not depended on the degree to which "property owners were able to refuse or limit their use of the … service" (Bolt v. City of Lansing, 1998). For the Michigan court, stormwater charges were effectively compulsory. Because the property owner had to use the service and was unable to control the extent to which it was used, the court reasoned the charges were a tax.
Although the United States Supreme Court has not spoken about stormwater charges specifically, it has distinguished between a tax and a fee for other services. In the National Cable Television Association case (1974), the Supreme Court states:
Taxation is a legislative function, and … [the Government], which is the … organ for levying taxes, may act arbitrarily and disregard benefits bestowed by the Government on a taxpayer and go solely on ability to pay, based on property or income. A fee, however, is incident to a voluntary act.
In a case before the Ohio Court of Federal Claims, it was noted that although the federal government properly can be charged for services purchased from local government entities, this particular stormwater charge was not a product of a voluntary purchase decision by the federal government and thus constituted a tax and not a fee for services. More revealingly the court held that the charge was not a fee because the municipality calculated and levied the stormwater charges regardless of the actual amount of runoff from the property. In other words, "Under the system enacted by the City of Cincinnati, during a month of drought or a month of flooding, the federal government would be assessed the same amount of storm drainage service charges. Although the formula in [the] plaintiff's Stormwater Management Code … ‘establishes a goal of basing the charges on runoff … ,' ultimately, it is assessed by the City of Cincinnati as a charge estimated on the square footage of the government's property and on the intensity of the property's development. The … charges … are not user fees based on actual use" (City of Cincinnati v. United States, 1997). Instead the liability for the charges arises—as it did in a Huntington, WV, case—from the federal government's "status as property owners" (United States v. City of Hungtington, 1993).
Also of interest is the discussion that emerged upon appeal of the case. In the appeal to the 4th District US Court of Appeals, the court considered whether the City of Cincinnati had established the stormwater charges as a product of an implied-in-fact contract between itself and the US. The court noted the elements of an implied-in-fact contract required "mutuality of intent to contract, consideration, and lack of ambiguity in offer and acceptance" (City of Cincinnati v. United States, 1998). The court held that the relationship between the city and the federal entity relative to the stormwater charges did not result in an implied-in-fact contract:
[The stormwater charge] was not imposed as a result of a consensual arrangement between the city and the United States, as would be true in the case of a voluntary purchase of utilities or other services. Instead, the stormwater drainage service charge was an assessment imposed on the United States involuntarily, by virtue of its status as a property owner. While the United States may be said to be a beneficiary of the storm drainage services provided by the city, it was not offerred the opportunity to choose whether to accept those benefits, and it cannot be said to have taken any action (other than not moving out of Cincinnati when the charges were assessed) to indicate its willingness to pay the charges.
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The implication of these cases is broad. Stormwater charges might not be acceptable if they are considered a tax that did not receive the approval of voters. On the other hand, the charges might not be acceptable because they are a fee that did not allow for voluntary acquiescence.
There is no groundswell of opposition to the implementation of stormwater utilities discernible among the public media. But as more and more communities face up to the National Pollutant Discharge Elimination System Phase II permitting requirements, more of them likely will encounter opposition. The underlying political legitimacy of stormwater utilities is not yet being directly questioned. But addressing the issue up front will go a long way in preserving the noble intent to improve the quality of life in communities throughout the US. Now is a better time to plan prudently.
Author's Bio: Dirk S.G. Brown, J.D., is the stormwater utility manager for the City of Columbus, OH, and a member of Stormwater's Editorial Advisory Board.
March-April 2004
Stormwater Charges A Fee or a Tax And Does It Matter
One of the most popular refrains in the chorus of stormwater-related customer inquiries is "I do not have stormwater service. Why do I have to pay for it?" Customers state they do not have any storm sewers in front of their property, stormwater does not drain off their property, or their downspouts are not tied to curb outlets that in turn lead to catch basins and storm sewers.
In developing a stormwater utility, it seems prudent to anticipate such inquiries and script a suitable response. Customer service is the essence of public service, so shaping a policy that helps people understand the benefit of paying the stormwater charge is a pragmatic approach to avoiding disgruntled customers. Furthermore, employee morale likely is enhanced through the presentation of clear policies. And finally the legitimacy of the institution is preserved.
Arguably, the level of resistance a new utility is likely to face is related to whether customers agree with the reasons for the charges in the first place. Resistance also arguably is related to how customers perceive the charge. So what exactly is a stormwater charge? Is it a fee? Is it a tax? And how should it be presented to the public?
Court stances have been split on this issue. Some say stormwater charges are fees; others say taxes. This column outlines the dominant arguments attached to each perspective and what various courts have said on the matter.
One might ask what difference it makes how charges are classified. Whether it is a fee or a tax, the money collected will be dedicated to providing needed service to the public. But characterization does matter. If stormwater charges are considered a tax, there might be state constitutional requirements governing how the charges can be assessed. Successful stormwater-utility implementation might depend on whether authority to implement is governed by a majority of voters or a majority of city council members. So classification can be critical. Just as important is that characterizing the charge as a tax or a fee might affect the level of revenue generated. Some properties are tax-exempt, but if the charge is characterized as a fee, these properties would contribute a share to the overall revenue picture.
What are the differences between the two perspectives? Generally speaking, the National Resources Defense Council (NRDC) review of state laws highlights common factors among the states. First, the charges "are intended to be and should be clearly described as a charge for a particular service"; second, users should receive some direct or indirect benefit from the service; and third, fees "should apply on the basis of contribution to the problem" the service is intended to address (NRDC, 1999).
From an overview of state court cases, clearly there is not one distinctive means by which to characterize stormwater charges. What is an important factor in one community is not the same in another. As the NRDC report points out, "A court in Oregon, in deciding that a storm drainage utility charge was not a tax, noted that the fees in question were not being levied exclusively against property owners" (Roseburg School District v. City of Roseburg, 1993).
In another example, a court in Michigan decided the distinction between a fee and a tax should be based on the following criteria:
- The user charges must serve a regulatory purpose rather than a revenue-raising purpose.
- The user charges must be proportionate to the costs of providing the service.
- The charges must be voluntary (Bolt v. City of Lansing, 1998).
The Michigan court placed a great deal of emphasis on voluntariness. Whether the stormwater charges were considered a fee or not depended on the degree to which "property owners were able to refuse or limit their use of the … service" (Bolt v. City of Lansing, 1998). For the Michigan court, stormwater charges were effectively compulsory. Because the property owner had to use the service and was unable to control the extent to which it was used, the court reasoned the charges were a tax.
Although the United States Supreme Court has not spoken about stormwater charges specifically, it has distinguished between a tax and a fee for other services. In the National Cable Television Association case (1974), the Supreme Court states:
Taxation is a legislative function, and … [the Government], which is the … organ for levying taxes, may act arbitrarily and disregard benefits bestowed by the Government on a taxpayer and go solely on ability to pay, based on property or income. A fee, however, is incident to a voluntary act.
In a case before the Ohio Court of Federal Claims, it was noted that although the federal government properly can be charged for services purchased from local government entities, this particular stormwater charge was not a product of a voluntary purchase decision by the federal government and thus constituted a tax and not a fee for services. More revealingly the court held that the charge was not a fee because the municipality calculated and levied the stormwater charges regardless of the actual amount of runoff from the property. In other words, "Under the system enacted by the City of Cincinnati, during a month of drought or a month of flooding, the federal government would be assessed the same amount of storm drainage service charges. Although the formula in [the] plaintiff's Stormwater Management Code … ‘establishes a goal of basing the charges on runoff … ,' ultimately, it is assessed by the City of Cincinnati as a charge estimated on the square footage of the government's property and on the intensity of the property's development. The … charges … are not user fees based on actual use" (City of Cincinnati v. United States, 1997). Instead the liability for the charges arises—as it did in a Huntington, WV, case—from the federal government's "status as property owners" (United States v. City of Hungtington, 1993).
Also of interest is the discussion that emerged upon appeal of the case. In the appeal to the 4th District US Court of Appeals, the court considered whether the City of Cincinnati had established the stormwater charges as a product of an implied-in-fact contract between itself and the US. The court noted the elements of an implied-in-fact contract required "mutuality of intent to contract, consideration, and lack of ambiguity in offer and acceptance" (City of Cincinnati v. United States, 1998). The court held that the relationship between the city and the federal entity relative to the stormwater charges did not result in an implied-in-fact contract:
[The stormwater charge] was not imposed as a result of a consensual arrangement between the city and the United States, as would be true in the case of a voluntary purchase of utilities or other services. Instead, the stormwater drainage service charge was an assessment imposed on the United States involuntarily, by virtue of its status as a property owner. While the United States may be said to be a beneficiary of the storm drainage services provided by the city, it was not offerred the opportunity to choose whether to accept those benefits, and it cannot be said to have taken any action (other than not moving out of Cincinnati when the charges were assessed) to indicate its willingness to pay the charges.
The implication of these cases is broad. Stormwater charges might not be acceptable if they are considered a tax that did not receive the approval of voters. On the other hand, the charges might not be acceptable because they are a fee that did not allow for voluntary acquiescence.
There is no groundswell of opposition to the implementation of stormwater utilities discernible among the public media. But as more and more communities face up to the National Pollutant Discharge Elimination System Phase II permitting requirements, more of them likely will encounter opposition. The underlying political legitimacy of stormwater utilities is not yet being directly questioned. But addressing the issue up front will go a long way in preserving the noble intent to improve the quality of life in communities throughout the US. Now is a better time to plan prudently.