Court Determined City Did Not Show Solid Waste Franchise Fees Were Not Taxes

This week, the California Supreme Court held the City of Oakland failed to demonstrate that solid waste franchise fees included in the City’s solid waste franchise agreements were exempt from voter approval requirements under Proposition 26. The Court remanded the case to the trial court for proceedings consistent with its opinion. This could include having the City demonstrate that the franchise fees are otherwise exempt from the definition of a “tax” under Proposition 26 in a manner consistent with the Court’s decision.

Factual and Procedural History
In Zolly v. City of Oakland, properties in the City of Oakland received garbage, mixed materials and organics, and residential recycling services from two private companies pursuant to franchise agreements with the City. The franchise agreements resulted from a public procurement process. The agreements required the haulers to pay the City franchise fees reflecting the value of the franchise rights granted to the haulers. The franchise fees were adopted by City ordinance. The haulers then established rates for solid waste services and directly billed customers for their services.

Solid waste customers sued the City, alleging that the franchise fees were taxes subject to voter approval. In Jacks v. City of Santa Barbara, which involved a challenge to electric utility franchise fees predating the most recent amendments to article XIII C with Proposition 26 (2010), the Court recognized that franchise fees are paid in consideration for a property interest, and the fees are not taxes subject to voter approval so long as they bear “a reasonable relationship to the value of the property interest.” The plaintiffs in Zolly argued that the solid waste franchise fees failed to meet this test established in Jacks. The trial court ruled that the plaintiff’s allegation that the franchise fees were passed along indirectly to ratepayers was not enough to establish that the taxes were imposed on customers, and ruled in favor of the City.

The First District Court of Appeal’s review was limited to whether the franchise fees were subject to the test set forth in Jacks. Under the revised California Constitution, article XIII C, section 1, subdivision (e), a “tax” is “any levy, charge, or exaction … imposed by a local government” subject to voter approval requirements unless it falls into one of seven expressly listed exemptions. Article XIII C, section 1(e)(4) exempts charges “imposed for entrance to or use of local government property, or the purchase, rental, or lease of local government property.” The appellate court determined that a solid waste franchise was “local government property” but that franchise fees must bear a reasonable relationship to the franchises’ value. The appellate court reversed the trial court and determined that the City had not met this burden at this stage of the litigation. It would be a factual matter.

California Supreme Court Affirms
Upon appeal by the City, the Court affirmed the appellate court decision. The Court determined that Oakland’s franchise fees were subject to the limitations in article XIII C, section 1(e) of the California Constitution, because the fees were enacted by ordinance and established by execution of the franchise agreement.

The Court further determined that Oakland did not demonstrate that the franchise fees were paid for the purchase or use of local government property under article XIII C, section 1(e)(4). The Court noted that the use of the term “property” under the article XIII C, section 1(e)(4) seems to refer to tangible, physical property under the City’s control, such as the streets and rights-of-way. As such, article XIII C, section 1(e)(4) did not apply based on the record before the court.

The Court did acknowledge two potential exemptions from article XIII C that might apply to the City’s franchise fees:

• The City might identify some tangible property interest that the solid waste haulers gained (i.e., special ability to drive heavy vehicles or to place waste containers on the street for collection) to qualify under article XIII C, section 1(e)(4).
• Article XIII C, section 1(e)(1) exempts charges imposed for a specific benefit conferred or privilege granted directly to a payor which do not exceed the “reasonable costs” to the local government for providing the specific benefit or privilege from the definition of a tax. The Court declined to determine whether it applied in this case because the City did not argue that it did.

Local agencies that receive franchise fees from a solid waste hauler may wish to consult with their legal counsel to discuss implications of the case.

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