47 Cal.App.5th 73
Cal. Ct. App.2020Background
- City of Oakland awarded municipal waste franchises to Waste Management of Alameda County (WMAC) and California Waste Solutions (CWS) and imposed large franchise fees (initially ~$25M and $3M) with annual adjustments tied to a cost indicator.
- City later redesignated $3.24M of WMAC’s franchise fee as a fee under Pub. Resources Code §41901 (the Redesignated Fee), with a possible automatic annual CPI-based increase and a backstop to increase the franchise fee if the redesignated amount is invalidated or uncollectible.
- Plaintiffs (Zolly et al.) sued for declaratory relief under California Constitution, art. XIII C and XIII D, alleging the franchise fees and the redesignated fee are unlawful taxes because they do not reasonably relate to the value of the franchises and were effectively passed on to ratepayers.
- The trial court sustained the City’s demurrer: it dismissed plaintiffs’ franchise-fee claims without leave to amend, and granted limited leave as to future increases to the Redesignated Fee; plaintiffs declined to amend and appealed.
- On appeal the court held the complaint adequately alleged that the franchise fees could be taxes under art. XIII C (so the demurrer as to franchise fees was wrongly sustained), but plaintiffs’ challenge to future Redesignated Fee increases was unripe, so that portion was affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether a municipal franchise fee can be a "tax" subject to art. XIII C | Franchise fees must be tested under Jacks: they are taxes if not reasonably related to the franchise's value | Franchise fees are compensation for use of government property and not a tax; contractual pass-through to customers does not make it a tax | A franchise fee may be a tax to the extent it exceeds a reasonable relationship to the value of the franchise; Jacks governs this inquiry |
| Whether the SAC adequately pleaded that Oakland's franchise fees are untethered to franchise value | SAC alleges lack of bona fide negotiation, no value analysis, grand jury findings, and disproportionately high fees | Allegations insufficient; fees were contract consideration and not "imposed by" the City for art. XIII C purposes | SAC allegations are sufficient under Jacks to state a claim that the franchise fees may be unlawful taxes; demurrer as to franchise fees reversed |
| Whether redesignated fee's future automatic CPI increases present a justiciable controversy | Plaintiffs seek declaratory relief now to preempt automatic increases they claim will be unlawful | Future increases are speculative, contingent, and may never occur; challenge is unripe | Challenge to future Redesignated Fee increases is not ripe; demurrer sustained as to that claim and affirmed on appeal |
| Whether contractual structure/pass-through defeats art. XIII C challenge | Substance controls; labels and pass-throughs cannot evade voter-approval requirements | Fee was set by contract and not "imposed" by local government; contractual formation distinguishes this case | Court rejects a loophole allowing governments to avoid art. XIII C by contracting; contractual pass-through does not automatically immunize the fee from scrutiny |
Key Cases Cited
- Jacks v. City of Santa Barbara, 3 Cal.5th 248 (Cal. 2017) (franchise fees are nontaxes only if reasonably related to the value of the franchise; excessive portions are taxes)
- Citizens for Fair REU Rates v. City of Redding, 6 Cal.5th 1 (Cal. 2018) (overview of Prop. 218/26 framework and art. XIII C/ D purposes)
- City of San Buenaventura v. United Water Conservation Dist., 3 Cal.5th 1191 (Cal. 2017) (interpreting Proposition 26’s burden-of-proof and reasonableness requirements for nontax fees)
- Sinclair Paint Co. v. State Bd. of Equalization, 15 Cal.4th 866 (Cal. 1997) (fees that exceed reasonable cost and are levied for unrelated revenue purposes function as taxes)