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California Court Strikes Down Tax on Tax Collection

2 min readBy: Joseph Bishop-Henchman

TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. on tax” isn’t a Dr. Seuss book: it was a device adopted by San Diego to get around the requirement that all tax increases be submitted to public vote. Wanting more revenue from the long-standing tax on landlords, the City decided to charge each landlord a “fee” associated with collecting the tax. (The result was $3.5 million in fees to collect an $11 million tax.)

Two local landlords with their attorney Ed Teyssier objected and filed suit, claiming that this “fee” was really a tax because landlords get no particularized benefits or services from it. Instead, the money just goes into a general fund. The Tax Foundation filed a friend-of-the-court brief, laying out the difference between taxes and fees and the importance of respecting it. The City won at the trial level.

Yesterday, the California Court of Appeal reversed the lower court (subscription required), holding unanimously that the charge is in fact a tax, and because it was not subject to a public vote, it is invalid and must be refunded. The Court also rejected a number of arguments offered by the City that might have saved the tax but done injustice to distinguishing between taxes and fees.

The Court wisely understands that tax money is often fungible, and looked beyond formalism to practical (economic) effects:

Whereas before the enactment of the Resolution a portion of the Business Tax proceeds were necessarily expended on the cost of administering the Business Tax program and collecting the tax, the imposition of the levy raised funds to pay for those costs, thereby permitting all of the Business Tax proceeds to be deposited in the general fund for expenditure on any and all governmental purposes. Thus, in practical effect, the levy is an increase in the Business Tax and therefore an increase in a general tax.

Emphasis theirs. A good decision, plus it’s always good to have a little shout-out (in footnote 18): “[W]e agree with the position of the Tax Foundation in its amicus curiae brief…”

The San Diego Union-Tribune has an excellent article on the case:

“San Diego wanted more revenue. Rather than just going to voters, they chose to play this definitions game,” said Joseph Henchman, tax counsel for the Tax Foundation in Washington, D.C., which filed a brief in support of getting rid of the fee. “To us, it’s such an obvious issue of trying to mislabel something that is clearly a tax.”

The case is Weisblat v. City of San Diego. The appellate opinion is located at 2009 WL 2506286.

More on our amicus program here.