By Ben Solis
Gongwer News Service
The Michigan Supreme Court on Monday ruled that a franchise fee collection agreement between the city of East Lansing and the Lansing Board of Water and Light was a tax unapproved by voters and, because the fee was imposed for a general revenue purpose, it violates the Headlee Amendment.
The high court therefore reversed the Court of Appeals’ dismissal of the complaint and affirmed the Ingham Circuit Court’s holding in Heos v. City of East Lansing (MSC Docket No. 165763).
The case involved a plaintiff who initially argued that fee was an impermissible tax imposed in violation of the Headlee Amendment and the Foote Act.
The trial court granted partial summary disposition to the plaintiff when the city argued the complaint was time barred by the statute of limitations.
The Court of Appeals reversed that decision and held the complaint was time barred. The high court was asked to determine whether the criteria for determining when a pass-through fee imposed by a local government on a business or utility should be considered a tax paid by a customer; and whether, in the context of a utility rate, a utility customer may challenge an improper pass-through fee as an improper rate in an action against the utility, among several other questions.
Greg Hanley, attorney for the BWL ratepayer James Heos, told justices during oral arguments that Headlee often forces local governments to make a simple but difficult choice in asking for more revenues in the form of taxation. Sometimes, Hanley said, municipalities have an incentive to evade the constitutional limitations created by Headlee by characterizing disguised taxes as fees, permits or licenses.
Laura Genovich, representing the city of East Lansing, told the justices during oral arguments the city disputes that this is a tax, at all, but that the taxpayer was the entity ultimately legally liable for the charge, and here, that was the Board of Water and Light.
In an opinion written by Justice Brian Zahra – joined by Justice Megan Cavanagh, Justice Elizabeth Welch and Justice Kyra Harris Bolden, the majority in Heos ruled that a municipality cannot circumvent the Headlee Amendment by enlisting a cooperative nongovernmental entity to accept the imposition of a franchise fee with the sole understanding that the entity would, in turn, be required to collect the fee from taxpayers and remit the revenue to the municipality.
“There is no question that the fee would be an illegal tax if the city imposed the charge directly on its residents,” Zahra wrote. “The issue therefore is whether a municipality may circumvent the Headlee Amendment by enlisting a cooperative nongovernmental entity to accept the imposition of a franchise fee with the express understanding that the entity would, in turn, collect the franchise fee from would be taxpayers and remit the revenue collected to the municipality. We hold that such an arrangement violates the Headlee Amendment because the purported ‘fee’ operates as a tax that has not been approved by the voters of the municipality.”
Specifically, Zahra and his colleagues concluded that the franchise fee functioned as a tax and was not proportionate to any costs the city incurred by BWL providing electrical services, and because the fee was not voluntary.
“We further hold that plaintiff is a taxpayer of that tax: The consumers of BWL electrical service who reside in the city bear the legal incidence of the challenged fee; BWL has no legal obligation to pay the franchise fee itself; BWL merely ‘collects and remits’ the fee from city residents to the city; and BWL places the challenged fee on the consumers’ bills, acting as a conduit for the city,” Zahra wrote. “We conclude that the franchise fee is an unauthorized tax in violation of the Headlee Amendment of the Michigan Constitution. We reverse the judgment of the Court of Appeals as to whether plaintiff is a taxpayer and remand this case to the trial court for further proceedings. Because the franchise fee is an unlawful tax and plaintiff is a taxpayer, the plaintiff has a viable Headlee claim to recover fees that were assessed and due within one year of filing this lawsuit.In all other respects, Zahra said the court was denying the remaining arguments in the plaintiff’s appeal.
Justice Richard Bernstein dissented in part, agreeing that the franchise fee was a tax, but disagreed that the plaintiff was a taxpayer. He would have instead affirmed the Court of Appeals in granting summary disposition to the city.
“Here, the BWL was legally responsible for paying the city the franchise fee at issue. It is undisputed that the BWL, not the plaintiff, was required to pay the franchise fee to the city under the franchise agreement and the ordinance as a condition of the city granting the BWL a franchise,” Bernstein wrote. “The tax obligation here therefore falls primarily on the BWL because it, not the plaintiff, is legally required to remit the fee to the city. That the economic burden fell on the plaintiff here does not make him a taxpayer. Therefore, I would conclude that the BWL is the taxpayer, not the plaintiff.”
Chief Justice Elizabeth Clement did not participate due to a potential interest in the controversy, and Justice Kimberly Thomas did not participate because the case was considered before she assumed office.
Gongwer News Service
The Michigan Supreme Court on Monday ruled that a franchise fee collection agreement between the city of East Lansing and the Lansing Board of Water and Light was a tax unapproved by voters and, because the fee was imposed for a general revenue purpose, it violates the Headlee Amendment.
The high court therefore reversed the Court of Appeals’ dismissal of the complaint and affirmed the Ingham Circuit Court’s holding in Heos v. City of East Lansing (MSC Docket No. 165763).
The case involved a plaintiff who initially argued that fee was an impermissible tax imposed in violation of the Headlee Amendment and the Foote Act.
The trial court granted partial summary disposition to the plaintiff when the city argued the complaint was time barred by the statute of limitations.
The Court of Appeals reversed that decision and held the complaint was time barred. The high court was asked to determine whether the criteria for determining when a pass-through fee imposed by a local government on a business or utility should be considered a tax paid by a customer; and whether, in the context of a utility rate, a utility customer may challenge an improper pass-through fee as an improper rate in an action against the utility, among several other questions.
Greg Hanley, attorney for the BWL ratepayer James Heos, told justices during oral arguments that Headlee often forces local governments to make a simple but difficult choice in asking for more revenues in the form of taxation. Sometimes, Hanley said, municipalities have an incentive to evade the constitutional limitations created by Headlee by characterizing disguised taxes as fees, permits or licenses.
Laura Genovich, representing the city of East Lansing, told the justices during oral arguments the city disputes that this is a tax, at all, but that the taxpayer was the entity ultimately legally liable for the charge, and here, that was the Board of Water and Light.
In an opinion written by Justice Brian Zahra – joined by Justice Megan Cavanagh, Justice Elizabeth Welch and Justice Kyra Harris Bolden, the majority in Heos ruled that a municipality cannot circumvent the Headlee Amendment by enlisting a cooperative nongovernmental entity to accept the imposition of a franchise fee with the sole understanding that the entity would, in turn, be required to collect the fee from taxpayers and remit the revenue to the municipality.
“There is no question that the fee would be an illegal tax if the city imposed the charge directly on its residents,” Zahra wrote. “The issue therefore is whether a municipality may circumvent the Headlee Amendment by enlisting a cooperative nongovernmental entity to accept the imposition of a franchise fee with the express understanding that the entity would, in turn, collect the franchise fee from would be taxpayers and remit the revenue collected to the municipality. We hold that such an arrangement violates the Headlee Amendment because the purported ‘fee’ operates as a tax that has not been approved by the voters of the municipality.”
Specifically, Zahra and his colleagues concluded that the franchise fee functioned as a tax and was not proportionate to any costs the city incurred by BWL providing electrical services, and because the fee was not voluntary.
“We further hold that plaintiff is a taxpayer of that tax: The consumers of BWL electrical service who reside in the city bear the legal incidence of the challenged fee; BWL has no legal obligation to pay the franchise fee itself; BWL merely ‘collects and remits’ the fee from city residents to the city; and BWL places the challenged fee on the consumers’ bills, acting as a conduit for the city,” Zahra wrote. “We conclude that the franchise fee is an unauthorized tax in violation of the Headlee Amendment of the Michigan Constitution. We reverse the judgment of the Court of Appeals as to whether plaintiff is a taxpayer and remand this case to the trial court for further proceedings. Because the franchise fee is an unlawful tax and plaintiff is a taxpayer, the plaintiff has a viable Headlee claim to recover fees that were assessed and due within one year of filing this lawsuit.In all other respects, Zahra said the court was denying the remaining arguments in the plaintiff’s appeal.
Justice Richard Bernstein dissented in part, agreeing that the franchise fee was a tax, but disagreed that the plaintiff was a taxpayer. He would have instead affirmed the Court of Appeals in granting summary disposition to the city.
“Here, the BWL was legally responsible for paying the city the franchise fee at issue. It is undisputed that the BWL, not the plaintiff, was required to pay the franchise fee to the city under the franchise agreement and the ordinance as a condition of the city granting the BWL a franchise,” Bernstein wrote. “The tax obligation here therefore falls primarily on the BWL because it, not the plaintiff, is legally required to remit the fee to the city. That the economic burden fell on the plaintiff here does not make him a taxpayer. Therefore, I would conclude that the BWL is the taxpayer, not the plaintiff.”
Chief Justice Elizabeth Clement did not participate due to a potential interest in the controversy, and Justice Kimberly Thomas did not participate because the case was considered before she assumed office.
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