State & Local Tax Bulletin (August 1997)
California Supreme Court Allows
Circumvent Proposition 13
By Richard E. Nielsen, of counsel in the
San Francisco office of Pillsbury Winthrop
Shaw Pittman LLP.
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material, omits many details and special rules and cannot be regarded as legal or tax
In a case monitored by many groups[fn. 1] throughout the State, the California Supreme Court reversed the
judgment of the Third District Court of Appeal which had affirmed the trial court's grant of
summary judgment in favor of Sinclair Paint Company ("Sinclair"). The unanimous opinion[fn. 2] authored by Associate Justice Chin rejected
Sinclair's contention that certain fees paid by Sinclair under the Childhood Lead Poisoning
Prevention Act of 1991 were in fact unconstitutional taxes imposed with less than the two-thirds
vote of the Legislature required by Proposition 13.[fn.
3] The Supreme Court held that case law clearly indicates that the police power is broad
enough to include mandatory remedial measures to mitigate the past, present, or future adverse
impact of the fee payer's operations, at least where, as here, the measure requires a causal
connection or nexus between the product and its adverse effects.
In 1991, the California Legislature enacted Assembly Bill No. 2038, the
Childhood Lead Poisoning Prevention Act of 1991 (the "Act"). AB 2038 passed the Legislature
with less than a two-thirds vote in both the Assembly and the Senate.[fn. 4] The Act created a new article in the California Health and Safety Code
beginning at section 372. Health and Safety Code section 372.7(a) imposes a "fee" on
"manufacturers and other persons . . . engaged in the stream of commerce of lead or products
containing lead," whether presently or at any time in the past. The "fee" also applies to any
persons who are "responsible for identifiable sources of lead" that have "significantly contributed
. . . to environmental lead contamination," whether presently or at any time in the past.
Under Health and Safety Code section 372.7(b), the California Department
of Health Services ("DHS") is required to establish specific "fees" by regulation. The statute
provides that to the maximum extent practicable, the "fees" are to be assessed on a person's "past
and present responsibility for environmental lead contamination," and a person's "market share"
responsibility for environmental lead contamination. The revenues generated by the "fees" are
applied to a program administered by the DHS relating to the detection and monitoring of lead
poisoning in children. The two industries which were singled out for the bulk of the payment of
the fees were the paint and petroleum industries.
Article XIIIA, Section 3 of the California Constitution requires that any
changes in state taxes enacted for the purpose of increasing revenues must be passed by a two-
thirds vote in both the Assembly and the Senate. This provision was added to the Constitution as
part of Proposition 13, the 1978 voter initiative that also placed new restrictions on property tax
rates, property tax assessments and local taxes. As the California Supreme Court recognized in
Amador Valley Joint Union High School District v. State Board of Equalization,
22 Cal. 3d 208 (1978), in which the Court upheld Proposition 13 against a constitutional
challenge, the individual elements of Proposition 13 together formed an interlocking "package" of
measures deemed necessary by the voters to assure effective tax relief. Taken together, the
elements of Proposition 13 create a system of firm fiscal restraints on the taxing powers of state
and local governments. In Section 3 of Article XIIIA, the voters made it clear that the Legislature
could not raise new revenues without the unequivocal mandate of a two-thirds majority.
Regulations were ultimately issued by DHS to implement the Act and in
March 1993, Sinclair was assessed $97,825.26 for the calendar year 1992. In May 1993, Sinclair
paid the assessment to the State Board of Equalization ("Board") which was charged under the Act
with collection of the so-called fees. Sinclair later filed an administrative claim for refund with the
Board asserting that the fees were unconstitutionally imposed taxes adopted in violation of the
voting requirements of section 3. The Board denied Sinclair's refund claim, and the underlying
refund suit was filed.
Sinclair filed its complaint for refund of the fees against the Board in
Sacramento Superior Court. Thereafter, DHS and other interested parties sought and were granted
leave to intervene. Sinclair noticed a motion for summary judgment based on a facial challenge to
the provisions of the Act on the ground that the fees constituted invalid taxes because the Act did
not receive a two-thirds vote of the Legislature.
Prior to hearing Sinclair's motion, the Board as well as the Intervenors
attempted to conduct extensive discovery. Sinclair resisted the discovery on the basis that it was
unnecessary for determination of its motion which it contended presented purely legal issues. The
Board filed a motion to compel.
The trial court held a hearing on Sinclair's summary judgment motion and
granted summary judgment in favor of Sinclair and against the Board, DHS and the Intervenors.
The discovery dispute was never heard.
The Court of Appeal affirmed and held that the fee in question was a tax
and not a regulatory fee because it was enacted solely for revenue purposes and its payment was
not connected with any regulation of the taxpayer itself. Accordingly, the Court of Appeal held the
fee was invalid and did not comply with the requirement of Proposition 13 that new state taxes be
passed by a two-thirds vote of the State Legislature.
Sinclair's Legal Arguments
Sinclair contended that the charges imposed by the Act were taxes rather
than permissible fees because they did not fund regulation of the fee payers or their products, nor
did they fund delivery of a government benefit or service to the fee payers. Sinclair argued that the
absence of regulation (at least the absence of any nexus between the present fee and specific
regulation) or benefit or service provided to the fee payer made the issue of the alleged burden
placed on society by Sinclair's products irrelevant. Further, Sinclair asserted that discovery by the
State and Intervenors directed against Sinclair was unnecessary in the context of a facial challenge
to the Act.
The Amici in support of Sinclair contended that the compulsory nature of the charge
indicated that it was a tax rather than a fee. Amici argued that remedying a burden created
by a fee payer's past activity is not by its very nature regulatory. Amici also argued that the
Act does not provide for any regulatory activity directed at the fee payers. Amici argued as
well that permitting discovery against fee payers in response to a facial challenge would create a
chilling effect on such challenges, and that the existence of any benefit should be established at the
time of the enactment of the statute.
The State's and Intervenors' Arguments
The State contended that it need not prove the existence of any benefit to
Sinclair from its payment of fees because the fees are used to reduce the burden placed on society
by Sinclair's and other fee payers' purported contribution to lead poisoning in children. Simply
put, the State contended that the mere imposition of the fee pursuant to the police power of the
State constituted regulation. (See note 5, infra, for the
Court's holding on this point.) The State also argued that extensive regulation of Sinclair and other
fee payers with respect to lead already existed at both the state and federal level, and that within
such a framework the imposition of the fee was valid. The State argued that it should have been
allowed to conduct discovery against Sinclair in order to establish the benefit (purportedly reduced
tort actions concerning lead poisoning) received by Sinclair from its payment of the fees. The State
asserted as well that the trial court improperly considered or relied on the legislative history
concerning the Act.
Supreme Court's Analysis
The Court phrased the issue as "[a]re the 'fees' section 105310 imposes in
legal effect 'taxes enacted for the purpose of increasing revenues' under Article XIIIA, Section 3,
and therefore subject to a two-thirds majority vote?" Slip op. at 6. The Court observed
that although no cases could be found that interpret the language of Section 3, several California
appellate decisions have considered whether various fees are really "special taxes" under Article
XIIIA, Section 4. The Court stated that these "special tax" cases may be helpful, though not
conclusive, in deciding the case before it. Slip op. at 6.
The Court noted that whether impositions are "taxes" or "fees" is a question
of law for the appellate courts to decide on an independent review of the facts. The distinction
between taxes and fees is frequently blurred, taking on different meanings in different contexts. In
general, taxes are imposed for revenue purposes, rather than in return for a specific benefit
conferred or privilege granted. Most taxes are compulsory but compulsory fees may be deemed
legitimate fees rather than taxes. Slip op. at 7-8.
The Court observed that special tax cases have involved three general
categories of fees or assessments: (1) special assessments, based on the value of benefits
conferred on property; (2) development fees, exacted in return for permits or other government
privileges; and (3) regulatory fees, imposed under the police power. All three of these may overlap
in a particular case. The Court then went on to consider each separately. Slip op. at 8.
Special assessments on property or similar business charges, in amounts reasonably reflecting the
value of the benefits conferred by improvements, are not "special taxes" under Article XIIIA,
Section 4. Neither are development fees enacted in return for building permits or other
governmental privileges if the amount of the fees bears a reasonable relation to the development's
probable costs to the community and benefits to the developer. The Court agreed with Sinclair and
the Court of Appeal that the fees did not constitute either special assessments or development fees
as the face of the statute makes clear that the funds collected are used to benefit children exposed to
lead, not Sinclair or other fee payers. Slip op. at 8-9.
The Court agreed with the State that the challenged fees fall within the third
category, namely, regulatory fees imposed under the police power, rather than the taxing power.
The Court relied on Pennell v. City of San Jose, 42 Cal.3d 365 (1986) for the proposition
that regulatory fees in amounts necessary to carry out the regulation's purpose are valid despite the
absence of any perceived benefit accruing to the fee payers. Slip op. at 10-11. Sinclair
argued and the Court of Appeal agreed that the Act was primarily aimed at raising revenue. The
Supreme Court disagreed and concluded that the Act imposes bona fide regulatory fees. Slip
op. at 12.
The Court stated that the Act required manufacturers and other persons
whose products exposed children to lead contamination to bear a fair share of the cost of mitigating
the adverse health effects their products created in the community. Viewed as a "mitigating effects"
measure, it is comparable in character to similar police power measures imposing fees to defray the
actual or anticipated adverse effects of various business operations. The Court observed that from
the viewpoint of general police power authority, it saw no reason why statutes or ordinances which
call upon polluters or producers of contaminating products to help in mitigation or clean-up efforts
should be deemed less "regulatory" in nature than the initial permit or licensing programs that allow
them to operate.[fn. 5] Slip op. at 12.
The Court stated that the case law cited or discussed clearly indicates that
the State's police power is broad enough to include the mandatory remedial measures to mitigate
the past, present or future adverse impact of the fee payers operations, at least where, as here, the
measure requires a causal connection or nexus between a product and its adverse effects. Slip
op. at 12.
The Court cited San Diego Gas & Electric Co. v. San Diego County Air
Pollution Control Dist., 203 Cal. App. 3d 1132 (1988) where it was held that a reasonable
way to achieve Proposition 13's goal of tax relief is to shift the costs of controlling stationary
sources of pollution from the tax-paying public to the pollution-causing industries themselves. In
the instant matter, the Court concluded that the shifting of costs of providing evaluation, screening
and medically necessary follow-up services for potential child victims of lead poisoning from the
public to those persons deemed responsible for that poisoning is likewise a reasonable police
power decision. In the Court's view, the fact that the challenged fees were charged after, rather
than before, the products' adverse effects were realized is immaterial to the question whether the
measure imposes valid regulatory fees rather than taxes. Slip op. at 14.
In the Court of Appeal, it was concluded that the fees were enacted solely
for revenue purposes and that their payment gave Sinclair and the other fee payers the right to carry
on their business without any further conditions. The Supreme Court disagreed. The Supreme
Court stated that all regulatory fees are necessarily aimed at raising revenue to defray the cost of the
regulatory program in question, but that fact does not automatically render those fees taxes. The
Court also found inconclusive the fact that the Act permits Sinclair and the other fee payers to carry
on their operations without any further conditions specified in the Act itself, because as indicated
above, fees can regulate business entities without directly licensing them by mitigating their
operation's adverse effects. The Court observed that the Act is part of a broader regulatory scheme
(other state and federal statutory provisions), which regulates Sinclair and other manufacturers in
the stream of commerce for products containing lead. Thus, the Court concluded that Sinclair's
payment of the challenged fees did not confer the right to carry on business without any further
conditions or regulations. Slip op. 16.
The Court concluded that under existing law, the challenged fees can be
reasonably characterized as regulatory fees rather than as taxes. The Court observed that Sinclair
can still attempt to prove at trial that the amount of fees assessed and paid exceeded the reasonable
cost of providing the protective services for which the fees were charged, or that the fees were
levied for unrelated revenue purposes. Additionally, Sinclair has the opportunity to try to show
that no clear nexus exists between its products and childhood lead poisoning, or that the amount of
the fees bore no reasonable relationship to the social or economic burdens its operations generated.
Slip op. at 17.
Over $45 million in fees have been collected under the Act. The potential
impact of Sinclair is tremendous since it is completely dependent upon the Legislature's propensity
to camouflage taxes as fees. Virtually every industry can be found to place some type of burden on
society and now the Court has only limited the Legislature's ability to impose fees on those
industries within the bounds of its inventiveness. It is difficult, if not impossible, to reconcile
Sinclair with the state of the law existing prior thereto. With this decision, the Supreme Court has
broken alarming new ground in the tax versus fee controversy. Proposition 218 was a response to
local governments being overzealous with fees and only the future will reveal what response may
be forthcoming if the State Legislature follows in their footsteps.
- Western States Petroleum Association ("WSPA"), Western
Independent Refiners Association ("WIRA"), California Manufacturers Association ("CMA"),
California Chamber of Commerce ("CCC") and California Taxpayers' Association ("Cal-Tax")
(hereinafter collectively referred to as "Amici") are nonprofit corporations and associations
whose members represent a broad cross section of enterprises engaged in business in California
and who appeared along with other organizations as amici in support of Respondent,
Sinclair Paint Company. They were represented by Richard E. Nielsen and Jeffrey M. Vesely of this firm. The California Medical Association, California Academy of Family
Physicians and various cities and counties were among the amici who appeared in support of
Appellants. [return to text]
- Associate Justice Janice Rogers Brown did not participate in the case
as she was the author of the Court of Appeal decision below. [return to
- California Constitution Article XIIIA, Section 3. [return to text]
- The Act was enacted by the provisions of AB 2038, introduced by
Assemblyman Lloyd G. Connelly on March 8, 1991. After numerous amendments in the
Assembly and the Senate, the bill was forwarded to Governor Pete Wilson on September 25,
1991. The Governor signed the bill on October 10, 1991. AB 2038 was recorded by the
Secretary of State as Chapter 799 of the Statutes of 1991. [return to
- The Court concluded that the imposition of "mitigating effects" fees in
a substantial amount "regulates" future conduct by deterring further manufacture, distribution, or
sale of dangerous products, and by stimulating research and development efforts to produce safer
or alternative products. What this conclusion ignores is that Sinclair's as well as other fee payer's
products are already subjected to federal and state regulations regarding lead content, which
presumably should deter and stimulate the conduct alluded to above. Also, what constitutes a
substantial amount? Is it payer related? Is it an absolute amount or measured in some other
fashion? [return to text]
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