The city of San Diego's 2004 levy on owners of rental property is a tax – not a "fee" to cover the cost of administering a business tax, as described by the city – and is illegal because it was not approved by voters, the Fourth District Court of Appeal ruled August 18.
At issue is an exaction initially set at $25 per year (subsequently reduced to $15 per year) collected from rental property owners. The city said the money was needed to pay for administering the rental unit business tax, or RUBT, which starts at $55 for a one-unit dwelling, and goes up to $150 plus $8 per unit on properties with more than 100 rental units. (Cal-Tax: Yes, the city was forcing some property owners to pay a $25 "fee" to cover the cost of administering a $55 tax!)
A group of landlords challenged the "fee," noting that the money is used to fund a basic government function – collecting taxes – and that they receive no benefit in return for the payments. They also noted that the 22 employees whose salaries are covered by the "fee" are responsible for answering questions from the general public and others who are not forced to pay the exaction. Therefore, they said, the levy is a tax that required voter approval under the terms of Proposition 218.
In its 32-page opinion, the appellate court agreed, and overturned the superior court judge who had granted summary judgment for the city. The court wrote: "We specifically hold the levy is not a fee, but rather is a general tax that is subject to the voter approval limitation set forth in article 13C, section 2, subdivision (b), and is thus void because it was levied by the City Council without approval by a majority vote of the qualified voters in the City."
City Attorney Jan Goldsmith, a former Republican legislator, said August 19 that the city will stop imposing the exaction, but will continue collecting a similar "fee" on other businesses – even though that exaction was approved in 2004 by the same City Council action that the court struck down. Mr. Goldsmith said the court's ruling applies only to the landlord "fee," not to similar exactions on other businesses. The San Diego Union-Tribune reported that "the city also has no plans to refund the $8.8 million in processing fees it has collected from rental-unit taxes in the past five years."
The court's opinion – a published opinion that can be cited as precedent – includes a lengthy discussion of Proposition 13, Proposition 218 and the distinction between a tax and a fee in light of the Sinclair Paint decision. The court concluded: "Here, the undisputed facts show that the primary, if not the sole, purpose of the levy is to raise revenue to pay for the costs of collecting the Business Tax, including the RUBT, and of administering the Business Tax program. Any regulatory effect is merely incidental. Accordingly, we conclude the undisputed material facts establish that the levy is not a regulatory fee."
Nor was the court swayed by the city's testimony that the landlords received a benefit by getting letters warning them that taxes were due. "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," the court wrote.
Because the rental property owners are seeking various forms of relief, including a refund of all "fee" proceeds collected to date (from $2.7 million to $3.5 million per year since the exaction was imposed in 2004), the case was remanded to the trial court with instructions to conduct further proceedings consistent with the ruling that the exaction is an illegal tax that has been voided. It is not known whether the city will appeal the ruling to the state Supreme Court. (Sources: Court of Appeal opinion, August 18; San Diego Union-Tribune, August 20.)
Cal-TaxReports, August 24, 2009
© 2009 California Taxpayers'
Association.
All Rights Reserved.