Zolly v. City of OaklandZolly v. City of Oakland
Justice Liu authored the opinion of the Court, in which Chief Justice Cantil-Sakauye and Justices Kruger, Groban, and Guerrero concurred.
Justice Jenkins filed a concurring opinion, in which Justice Corrigan concurred.
Through a series of ballot initiatives, California voters have imposed several constitutional limitations on the ability of local governments to tax. Because these limitations may apply to charges that a local government does not formally designate as taxes, whether particular charges fall within the scope of the Constitution‘s taxation limitations is a recurring issue that both voters and the courts have addressed.
In 2012, the City of Oakland approved two contracts granting private waste haulers the right to “transact business, provide services, use the public street and/or other public places, and to operate a public utility” for waste collection services. As “consideration for the special franchise right,” the waste haulers agreed to pay certain fees to Oakland. We granted review to decide how such fees should be treated under
We hold that Oakland has not shown on demurrer that its challenged fees are exempt from
Proposition 26 provides the general definition of a “tax” and a list of enumerated exemptions that are at the center of this dispute. To understand this measure, it is helpful to place it in the context of other voter initiatives that have limited the ability of local governments to tax, beginning in 1978 with the passage of Proposition 13.
Proposition 13 required the imposition of any “special taxes” to be approved by two-thirds of the qualified electors of the city, council, or special district. (
In 1996, California voters passed Proposition 218, which amended the Constitution‘s voter approval requirements for local revenue-raising measures by adding articles XIII C and XIII D. (Citizens for Fair REU Rates v. City of Redding (2018) 6 Cal.5th 1, 10.) Article XIII D, which is not relevant here, “limits the authority of local governments to assess taxes and other charges on real property.” (Citizens for Fair REU Rates, at p. 11.)
Proposition 218 did not define what constitutes a “tax.” The electorate addressed that issue in 2010 with the enactment of Proposition 26. (Jacks v. City of Santa Barbara (2017) 3 Cal.5th 248, 260 (Jacks).) This measure amended
“(1) A charge imposed for a specific benefit conferred or privilege granted directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of conferring the benefit or granting the privilege.
“(2) A charge imposed for a specific government service or product provided directly to the payor that is not provided to those not charged, and
which does not exceed the reasonable costs to the local government of providing the service or product. “(3) A charge imposed for the reasonable regulatory costs to a local government for issuing licenses and permits, performing investigations, inspections, and audits, enforcing agricultural marketing orders, and the administrative enforcement and adjudication thereof.
“(4) A charge imposed for entrance to or use of local government property, or the purchase, rental, or lease of local government property.
“(5) A fine, penalty, or other monetary charge imposed by the judicial branch of government or a local government, as a result of a violation of law.
“(6) A charge imposed as a condition of property development.
“(7) Assessments and property-related fees imposed in accordance with the provisions of Article XIII D.” (
Art. XIII C, § 1, subd (e)(1)-(7) .) Here the parties dispute the scope of the fourth exemption.
Following this list of exemptions, Proposition 26 provides that “[t]he local government bears the burden of proving by a preponderance of the evidence that a levy, charge, or other exaction is not a tax, that the amount is no more than necessary to cover the reasonable costs of the governmental activity, and that the manner in which those costs are allocated to a payor bear a fair or reasonable relationship to the payor‘s burdens on, or benefits received from, the governmental activity.” (
Proposition 26 also amended
II.
In this case, the trial court sustained Oakland‘s demurrer to plaintiffs’ second amended complaint alleging that certain franchise fees were imposed in violation of
Plaintiffs allege that in 2012, Oakland initiated a procurement process for franchise contracts regarding garbage, mixed materials and organics, and residential recycling services. Following a settlement between the two firms
Oakland‘s ordinance approving the mixed materials and organics contract provided for an initial annual franchise fee of $25,034,000, with subsequent franchise fees “‘adjusted annually by the percentage change in the annual average of the Franchise Fee cost indicator.‘” (Zolly v. City of Oakland (2020) 47 Cal.App.5th 73, 79 (Zolly).) Thereafter, Oakland passed an ordinance reducing this franchise fee by $3.24 million. The ordinance approving the residential recycling contract provided for an initial annual franchise fee of $3,000,000, with a similar mechanism for annual adjustments.
Based on “citizen complaints,” an Alameda County grand jury “undertook a comprehensive investigation related to the solicitation and award” of these contracts. (Zolly, supra, 47 Cal.App.5th at p. 79.) The grand jury found that Oakland‘s fees were disproportionately higher than franchise fees paid to other Bay Area municipalities and special districts. It also found Oakland‘s procurement process was mishandled and subject to political considerations.
Plaintiffs are owners of multifamily properties who pay their tenants’ waste collection bills. Their second amended complaint alleges that Oakland‘s fees violated
The Court of Appeal relied on our opinion in Jacks, supra, 3 Cal.5th 248. There, we addressed the circumstances in which franchise fees constitute “taxes” subject to the Constitution‘s voter approval requirements. Because the franchise fee there had been imposed prior to 2010, we limited our discussion to the interpretation of Proposition 218. (Jacks, supra, 3 Cal.5th at p. 263, fn. 6.) First, we acknowledged that “franchise fees” have “[h]istorically . . . not been considered taxes.” (Id. at p. 267.) Next, we observed that the common denominator among the “categories of valid fees” we had previously recognized as falling outside the Constitution‘s taxation limitations was that the charge or fee “was restricted to an amount that had a reasonable relationship
The Court of Appeal first rejected Oakland‘s argument that Jacks‘s holding should be limited to the narrow context where a surcharge is placed directly on customers’ bills, instead reasoning that ”Jacks instructs us to look beyond any label and determine whether such a fee ‘reflect[s] a reasonable estimate of the value of the franchise.‘” (Zolly, supra, 47 Cal.App.5th at p. 85.)
The Court of Appeal then considered whether the adoption of Proposition 26 altered the analysis. The court assumed the applicability of
Turning to the ballot materials, the Court of Appeal found that they “uniformly indicate a desire to expand the definition of what constituted a ‘tax’ for purposes of article XIII C.” (Zolly, supra, 47 Cal.App.5th at p. 87 approval requirements. (Id.) In light of this “clear” intent to close loopholes and expand the definition of a tax, the Court of Appeal concluded that franchise fees “must still be reasonably related to the value of the franchise” to be exempt under article XIII C, section 1, subdivision (e). (Zolly, at p. 88.)
In addition, the Court of Appeal rejected Oakland‘s argument that the challenged fees were not taxes “‘imposed by local government‘” because they were merely “consideration” for a contract negotiated between Oakland and the utilities. (Zolly, supra, 47 Cal.App.5th at p. 88article XIII C on that theory would enable local governments to contract with third parties to impose a desired tax on residents, thereby undermining the purposes of Propositions 218 and 26. ( Zolly, at p. 88Jacks “implicitly rejected this argument.” (Zolly, at p. 88Jacks was similarly established “‘[p]ursuant to an agreement between [the utility provider] and defendant City of Santa Barbara,‘” this fact did not automatically exempt the charge from being treated as a tax. (Zolly, at pp. 88-89, quoting Jacks, supra, 3 Cal.5th at p. 254.) Instead, the court held, the crux of the analysis remained whether the fees imposed bear a reasonable relationship to the value received from the government.
III.
As an initial matter, Oakland argues that plaintiffs lack standing because they are not “directly obligated” to pay for the franchise fees; instead, any economic injury they suffer is only indirectly passed on to them in the form of waste management fees charged by the waste haulers. Although Oakland did not raise this issue below, “‘[c]ontentions based on a lack of standing involve jurisdictional challenges and may be raised at any time in the proceeding.‘” (Californians for Disability Rights v. Mervyn‘s, LLC (2006) 39 Cal.4th 223, 233, quoting Common Cause v. Board of Supervisors (1989) 49 Cal.3d 432, 438.)
Absent specific requirements for a statutory cause of action, standing in civil cases is governed by the “general standing requirements under [Code of Civil Procedure]
Oakland relies on Chiatello v. City and County of San Francisco (2010) 189 Cal.App.4th 472 (Chiatello) and County Inmate Telephone Service Cases (2020) 48 Cal.App.5th 354 (
In County Inmate, inmates in nine counties challenged the allegedly inflated commissions paid by telecommunications companies to the counties under contracts giving them the exclusive right to provide telephone services. The inmates alleged that the companies passed on the cost of the commissions to the inmates and their families. But the Court of Appeal held that because the inmates had “no legal responsibility to pay anything to the counties,” they lacked standing to “contend the commissions are an unconstitutional tax” under Proposition 26 and to seek a refund of those taxes. (County Inmate, supra, 48 Cal.App.5th at pp. 361, 360.) As support for a “general rule . . . that a person may not sue to recover excess taxes paid by someone else,” the court cited Grotenhuis v. County of Santa Barbara (2010) 182 Cal.App.4th 1158. (County Inmate, at p. 360.) But that decision does not claim to pronounce any general limitation on standing. Instead, Grotenhuis involved the statutory requirements for a “tax refund action” under
In light of plaintiffs’ allegations of an economic injury caused by the challenged fees, we hold that plaintiffs have standing to file this suit.
IV.
In arguing that its challenged fees are not subject to the Constitution‘s voter approval requirements, Oakland first contends that the fees in question
A.
Turning to the general definition of a “tax” under Proposition 26, Oakland does not dispute its fees are a “levy, charge, or exaction of any kind.” (
The text of
Proposition 26‘s use of the same term when referring to development charges, another form of voluntary charges, also indicates that the word “imposed” was not intended to limit
Relatedly, Oakland argues that its fees were not “imposed” on customers because customers “may” only feel the indirect impact of those charges if the service provider uses it as “one cost factor among many in setting rates to customers.” But as explained above, whether customers were directly obligated to pay the charge to Oakland is immaterial. It is sufficient that Oakland, pursuant to its legal authority, enacted these franchise fee agreements into law, thereby imposing these fees on the waste haulers that are indisputably obligated to pay them. If Oakland is suggesting there is uncertainty as to whether any portion of customers’ bills is actually attributable to the fees, that is a factual issue bearing on plaintiffs’ allegations of financial injury that cannot be resolved on demurrer.
B.
Having determined that the challenged fees fall within Proposition 26‘s general definition of a tax, we now consider whether Oakland has demonstrated on demurrer that these fees are exempt from the Constitution‘s voter approval requirements by virtue of Proposition 26‘s express exemptions.
While the parties’ briefing initially focused on whether
The word “property” is commonly used in two different senses. First, “‘property’ is used simply to refer to the physical object in question — that is the thing itself.” (Pacific Gas & Electric Co. v. Hart High-Voltage Apparatus Repair & Testing Co., Inc. (2017) 18 Cal.App.5th 415, 426.) Second, the word may “‘denote the legal interest (or aggregate of legal relations) appertaining to such physical object.‘” [Citation.] When used in the latter sense, ‘property’ is composed of a “complex aggregate of rights (or claims), privileges, powers, and immunities.” ” (Ibid.; see also In re L.T. (2002) 103 Cal.App.4th 262, 263; 51 Cal.Jur.3d (2022) Property, § 1.) Oakland, invoking this latter sense of the word, argues that a franchise is “local government property” because it is a “bundle of property interests.” Similarly, our previous statements equating franchises to “property” were premised on this broader understanding. (See Jacks, supra, 3 Cal.5th at p. 254 [“the right to use public streets or rights-of-way is a property interest“], italics added.)
However, the term “local government property” in
But even if the term “property” in
At oral argument, counsel suggested that Oakland, even though it does not have a property interest in the franchise itself, nonetheless has a property interest in its antecedent right to grant a franchise. But even if so, the challenged fees here were paid for the franchise that vested in the payors, not for the right to grant that franchise to another party. Accordingly, the fees were not for the “purchase of” the “local government property” that Oakland posits.
We turn next to Oakland‘s argument regarding the first clause of Exemption 4 — namely, that the fees are charges “imposed for . . . use of local government property.” Here, Oakland relies on our general statement in Jacks describing a franchise as encompassing “the right to use public streets or rights-of-way” (Jacks, supra, 3 Cal.5th at p. 254) and the terms of the specific ordinances enacting its challenged fees. The ordinances describe the franchises as including the rights to “transact business, provide services, use the public street and/or other public places, and to operate a public utility for Mixed Materials and Organics [or Residential and Commercial Recycling] collection services.” We conclude that Oakland has not proven, on demurrer, that its challenged fees fall within the first clause of Exemption 4.
Oakland has not demonstrated as a matter of law that the payors paid the challenged fees in exchange for a specific use of government property that they would not have enjoyed had they not paid the fee. The text of Exemption 4 supports such a fact-specific requirement by focusing on the actual benefit exchanged between the payor and local government. Exemption 4 does not use the term “franchise fees“; instead, it exempts “[a] charge imposed for entrance to or use of local government property.” By describing the qualitative rationale for the charge instead of using any formal labels, this language indicates that the voters intended to exempt only those fees that adhered to the rationale underlying that exemption — i.e., fees paid as consideration for a specific use of government property.
So understood, Exemption 4‘s “imposed for” language applies naturally to traditional types of entrance and user fees for local government property. For fees such as a park entrance fee, there is little question that payment is a necessary condition for “entrance to or use of” the property. (
Here, Oakland has yet to demonstrate that the waste management providers gained any “use of local government property” in exchange for their payment of the challenged fees. (
Finally, we note that several amici argue that Oakland‘s challenged fees should be subject to
Because Oakland has not shown, as a matter of law, that
LIU, J.
We Concur:
CANTIL-SAKAUYE, C. J.
KRUGER, J.
GROBAN, J.
GUERRERO, J.
Concurring Opinion by Justice Jenkins
I agree with the majority that the trial court should have overruled the City of Oakland‘s demurrer to the second amended complaint of plaintiffs Robert Zolly, Ray McFadden, and Stephen Clayton (plaintiffs) because Oakland has failed to show that the fees at issue here are, as a matter of law, exempt from the voter approval requirements of
I.
For purposes of its voter approval requirements,
Oakland alternatively argues that the fees in question fall within one of the express exemptions to
I agree with the majority that Oakland has failed to show that, as a matter of law, the fees fall within this exemption. Oakland contends in part that the franchise itself is a form of “local government property” within the meaning of Exemption 4, and that the fee is a charge imposed for “the purchase . . . of [that] local government property.” However, as the majority explains, because
II.
Regarding the first aspect of Oakland‘s argument for applying Exemption 4, the majority offers additional comment. Responding to Oakland‘s assertion that the franchise itself is a form of “local government property” that the fees are paid to “purchase,” the majority first opines: “[T]he term ‘local government property’ in article XIII C seems to refer to physical objects under the control of a local government, such as its streets and rights-of-way.” (Maj. opn., ante, at p. 15.)
I do not join this discussion because, in my view, it is unnecessary to resolve this case. The majority‘s conclusion — with which I agree — that the franchise itself does not constitute “local government property” within the meaning of Exemption 4 completely disposes of Oakland‘s argument that the fee is payment for the “purchase . . . of local government property.” We therefore need not speculate on whether “the term ‘local government property’ in article XIII C seems to refer [only] to [actual] physical objects” and not to mere “property interests in such objects.” (Maj. opn., ante, at pp. 15, 16.)
At the end of its opinion, the majority “note[s]” the argument of several amici that the fees here at issue are “subject to article XIII C, section 1, subdivision (e)(1) (Exemption 1), which exempts a charge ‘imposed for a specific benefit conferred or privilege granted directly to the payor that is not provided to those not charged,’ but only if the charge ‘does not exceed the reasonable costs to the local government of conferring the benefit or granting the privilege.‘” (Maj. opn., ante, at p. 20.) As the majority explains, “we have no need to decide” in this case whether “Exemption 1 applies to [the] challenged fees” because “Oakland has not sought to show” that it does.
With these limitations, I concur in the judgment.
JENKINS, J.
I Concur:
CORRIGAN, J.
See next page for addresses and telephone numbers for counsel who argued in Supreme Court.
Name of Opinion Zolly v. City of Oakland
Procedural Posture (see XX below)
Original Appeal
Original Proceeding
Review Granted (published) XX 47 Cal.App.5th 73
Review Granted (unpublished)
Rehearing Granted
Opinion No. S262634
Date Filed: August 11, 2022
Court: Superior
County: Alameda
Judge: Paul D. Herbert
Counsel:
Zacks, Freedman & Patterson, Andrew M. Zacks; Katz Appellate Law and Paul J. Katz for Plaintiffs and Appellants.
Horvitz & Levy, Jason R. Litt, Jeremy B. Rosen and Joshua C. McDaniel for McLane, Bednarski & Litt LLP and Rapkin & Associates, LLP, as Amici Curiae on behalf of Plaintiffs and Appellants.
Jonathan M. Coupal, Timothy A. Bittle and Laura E. Dougherty for Howard Jarvis Taxpayers Association as Amicus Curiae on behalf of Plaintiffs and Appellants.
Peluso Law Group and Larry A. Peluso for Reuben Zadeh, Mable Chu and Herb Nadel as Amici Curiae on behalf of Plaintiffs and Appellants.
Barbara Parker, City Attorney, Doryanna Moreno, Maria Bee, David Pereda, Celso Ortiz and Zoe Savitsky, Assistant City Attorneys; Chao ADR, Cedric C. Chao; DLA Piper, Tamara Shepard, Mauricio Gonzalez, Stanley J. Panikowski and Jeanette Barzelay for Defendant and Respondent.
Best Best & Krieger, Joshua Nelson, Lutfi Kharuf and Joanna Gin for League of California Cities and the California State Association of Counties as Amici Curiae on behalf of Defendant and Respondent.
Olson Remcho, Robin B. Johansen, Thomas A. Willis and Margaret R. Prinzing for Legislature of the State of California as Amicus Curiae on behalf of Defendant and Respondent.
Orrick, Herrington & Sutcliffe, Brian P. Goldman, Devin Brennan, Monica Haymond, Ethan P. Fallon; Kathleen A. Kane and Adrienne D. Weil for Bay Area Toll Authority and Metropolitan Transportation Commission as Amici Curiae on behalf of Defendant and Respondent.
Kabateck, Brian S. Kabateck and Mike Arias for Consumer Attorneys of California as Amici Curiae.
Counsel who argued in Supreme Court (not intended for publication with opinion):
Paul J. Katz
Katz Appellate Law PC
484 Lake Park Avenue, #603
Oakland, CA 94610
(510) 920-0543
Cedric C. Chao
Chao ADR, PC
50 California Street, Suite 1500
San Francisco, CA 94111
(415) 293-8088