Reinforcement of Voters’ Rights to Approve Local Government Taxes

California Court Of Appeal Opinion Reinforces Voters’ Right To Approve Local Government Taxes Under California Constitution

The California Court of Appeal’s recent decision in Zolly v. City of Oakland, 47 Cal.App.5th 73 (2020), upholds the intent of California voters in adopting article XIII C of the California Constitution (“article XIII C”).

Article XIII C generally prohibits local governments from increasing taxes without voter approval.  Under section 1(e), the article defines “tax” broadly to include any levy, charge, or exaction imposed by a local government, but contains seven exceptions, one of which is a charge imposed for use of local government property.

In Zolly, the City of Oakland entered into various contracts with two waste management companies.  As part of the agreements, the two companies agreed to pay franchise fees to the City. The City redesignated part of the franchise fee charged to one of those companies as a fee to recover the City’s costs incurred in “preparing, adopting, and implementing the Alameda County Integrated Waste Management Plan,” pursuant to Public Resources Code section 41901.  The plaintiffs challenged the legality of the fees, alleging that the fees were taxes and were invalid because voters had not approved them under article XIII C.  The City demurred, arguing the franchise fees were not taxes subject to article XIII C.  The trial court agreed and granted the City’s demurrer without leave to amend.

The appellate court reversed.  Relying on the California Supreme Court’s decision in Jacks v. City of Santa Barbara, 3 Cal.5th 248 (2017), the court explained that while franchise fees generally fall within article XIII C’s exception for charges for the use of government property, courts must look beyond labels and determine whether a fee charged by the government is a “nontax fee” or a “tax.” To constitute a nontax fee for the use of government property, a franchise fee must bear a reasonable relationship to the value received from the government. To the extent the franchise fee exceeds such value, the excessive portion constitutes a tax and requires voter approval.

Because the plaintiffs alleged that the franchise fees imposed by the City did not bear a reasonable relationship to the value received, were not based on the value of the franchises conveyed, and were set based on the prior franchise fee without any analysis of the value of the prior franchise, the Zolly court concluded that their complaint sufficiently stated a claim under Jacks.

For local governments and their contractors, Zolly clarifies, and potentially broadens, the categories of fees that fall within the definition of a tax and require voter approval.  For taxpayers, Zolly provides a roadmap for navigating the pleading stages in challenging the constitutionality of local government fees and charges.

Private and public sector entities seeking advice regarding these, or other matters relating to an exclusive government franchise, should contact Wright, L’Estrange & Ergastolo’s Administrative Law & Regulatory Disputes practice group.

Wright, L’Estrange & Ergastolo legal alerts are not intended as legal advice. Additional facts or future developments may affect any laws, subjects, or information shared. Seek the advice of an attorney before acting or relying upon any information in this legal alert.