Extras on Excise: The Difference Between a ‘Tax’ and ‘Fee’ and Why It Matters

The difference between a tax and a fee generally turns on the use of the revenue.  Is the revenue meant to raise money that can be used to defray the general costs of government?  It’s a tax.  Is the revenue meant to pay for the costs of a specific government program or service?  It’s a fee.

There are other important distinctions between taxes and fees.  Some states require voter approval for tax increases, but not for fees.  Some state legislatures require supermajorities to increase taxes but do not apply the same rules to fee impositions or increases. 

These seemingly straightforward concepts of what is a tax and what is a fee are instructively dissected and clarified when a court, like a recent opinion from the Colorado Court of Appeals, provides its interpretation of what the difference is between the two.  The California Superior Court also provides an example of another taxpayer’s unsuccessful attempt to use the tax-versus-fee distinction to challenge not just its own tax liability, but the state constitutionality of a program based on how it is funded. 

In TABOR Foundation v. Colorado Bridge Enterprise, No. 13CA1621, the Colorado Court of Appeals affirmed that the Colorado Bridge Enterprise (CBE) did not levy a tax prohibited by the state’s Taxpayer Bill of Rights (TABOR) when it imposed a bridge safety surcharge on vehicles in the state subject to registration fees.  (The court addressed other issues related to the surcharge, but this blog focuses only on the tax versus fee provisions.)  Colorado’s Taxpayer Bill of Rights (Colo. Const. art. X, § 20) requires voter approval for any new tax or the issuance of debt, and in this situation the state did not seek voter approval for the surcharge.  

The court disagreed with the TABOR Foundation’s argument that the surcharge is a tax because it is collected without regard to any services used by the vehicles for which the charge is imposed.  It laid out three factors that it weighed in determining whether a charge is a tax or a fee: 

  • the primary purpose of the charge as discussed in the enabling statute,
  • the primary purpose for which the revenue is raised, and
  • whether the primary purpose of the charge is to finance or defray the cost of services provided to those who must pay it.

The court found that the first two factors favor determining that the charge is a fee and not a tax.  The bridge safety surcharge is intended to finance, repair, reconstruct and replace any designated Colorado highway bridge, under the statute passed by the state legislature.  Further, the money raised does not defray the costs of general state expenses—the surcharge can only be imposed for the purpose of financing, repair, reconstruction and replacement of designated bridges. 

On the third factor, where the TABOR Foundation had a stronger argument, the court came up with more rejection.  The court did not agree with the TABOR Foundation’s position that there must be a direct nexus or physical connection between an individual’s use and the permissibility of the user fee.  Still, it acknowledged that this argument was the TABOR Foundation’s best shot, in that it was the “only factor that could indicate that the charge is actually a tax” because persons registering their vehicles might never use a CBE bridge.  At the trial court level, two members of the TABOR Foundation testified that they objected to paying the bridge safety surcharge on at least one of their vehicles because they used those vehicles only within their home county, where there were no CBE-designated bridges.  

The court found that as long as a charge is reasonably related to the overall cost of providing the service and is imposed on those who are reasonably likely to benefit from or use the service, the charge is a fee and not a tax.  It declined to hold that a specific nexus is required. 

And in California Chamber of Commerce v. California Air Resources Board, No. 34-2012-80001313, the California Superior Court in Sacramento found last year that it was a close question, but auction fees for greenhouse gas emission allowances are regulatory fees and not taxes (which would have required a supermajority vote of the state legislature), according to an article in Bloomberg BNA’s Daily Tax Report.  Taxes in California must be approved by a supermajority of the Legislature, and in this situation, the bill that allowed for the imposition of the fees as part of a cap-and-trade program was not passed with a supermajority of support. 

The judge discussed several kinds of fees (special assessments and related business charges, development fees, user fees and regulatory fees), found that the charges at issue do not fall squarely within any of them, and then acknowledged that revenue-producing measures do not have to fit neatly into traditional fee classifications.  The court agreed with the California Air Resources Board that the charges should be upheld as “regulatory” fees or charges because they do not have the traditional attributes of a tax, because: 

  • the charges were imposed for regulatory purposes, not for unrelated revenue purposes;
  • those who purchase allowances get a valuable benefit that others do not receive;
  • the charges are not compulsory;
  • the market, rather than the government, determines the amount charged; and
  • the proceeds are used to further the regulatory purposes of the legislation, and cannot be used for the general support of the government.

The case is on appeal.  If the California Court of Appeals finds that these allowances are a tax rather than a fee, the taxpayers could get the double benefit of not only not paying, but requiring California to rethink how it supports its regulatory programs. 

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Should states require a specific nexus between a person’s use of a service or benefit and the imposition of a fee? 

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