Paper Carryout Bag Charge Is Not A Tax

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Taxpayers and a manufacturer of plastic bags challenged a county ordinance that prohibits retail stores from providing customers with plastic carryout bags and requires the stores to charge their customers ten cents for each paper carryout bag they provide their customers.  The taxpayers and manufacturer contend the ten-cent charge is a tax that was not approved by county voters.  The court of appeal held that the paper carryout bag charge is not a tax for purposes of article XIII C of the California Constitution because it is payable to the retail store, retained by the retail store, and it is not remitted to the county.  (Schmeer v. County of Los Angeles (--- Cal.Rptr.3d ----, Cal.App. 2 Dist., February 21, 2013).

Facts

On November 23, 2010, the Los Angeles County Board of Supervisors enacted Ordinance No. 2010-0059 (“Ordinance”), which prohibits retails stores located within the unincorporated areas of Los Angeles County (“County”) from providing plastic carryout bags to their customers.  The Ordinance, which became effective on July 1, 2011, was not submitted to the electorate of the County for approval. 

The Ordinance provides “that retail stores may provide, for the purpose of carrying goods away from the store, only recyclable paper carryout bags or reusable carryout bags meeting certain requirements (including plastic bags satisfying those requirements).”  Pursuant to the Ordinance, “retail stores must provide reusable bags to customers, either for sale or free of charge” and the Ordinance also “encourages retail stores to educate their employees to promote reusable bags and post signs encouraging customers to use reusable bags.”  Retail stores must charge ten cents per recyclable bag that the store provides to the customer and must provide on the receipt given to the customer how many bags were provided and the total charge for the bags.  The money received by the store for the bags “must be retained by the store and used only for (1) the costs of compliance with the ordinance; (2) the actual costs of providing recyclable paper bags; or (3) the costs of educational materials or other costs of promoting the use of reusable bags.”

Taxpayers Lee Schmeer, Salim Bana, Jeff Wheeler, Chris Wheeler, and Hilex Poly Co. LLC, a manufacturer of plastic bags that are prohibited by the Ordinance, filed a petition for writ of mandate and a complaint against County and three of its officials.  The taxpayers and the manufacturer (collectively, “Petitioners”) alleged that the required charge for paper carryout bags under the Ordinance is a tax within the meaning of article XIII C of the California Constitution, as amended by Proposition 26.  Petitioners alleged that County imposed the bag charge in violation of section 2 of article XIII C, which prohibits a local government from imposing a new general or special tax without voter approval.  The trial court concluded the paper carryout bag charge is not a general or special tax and denied Petitioners relief on their petition for writ of mandate and complaint.

Decision

The court of appeal affirmed the judgment of the trial court finding that the paper carryout bag charge is not a tax for purposes of article XIII C because the bag charge is only payable to a retail store, it is retained by the store, and it is never remitted to the County.

California voters adopted Proposition 13 in 1978.  Proposition 13, which added article XIII A to the California Constitution, limited the rate of ad valorem taxes, limited increases in the assessed value of real property unless there is a change in ownership, required that changes in State taxes for the purpose of raising revenues must be approved by two-thirds of the Legislature, and “required that special taxes imposed by cities, counties, and special districts must be approved by a two-thirds vote of the electors.”

Proposition 218, which added articles XIII C and XIII D to the California Constitution, was adopted by California voters in November 1992.  Proposition 218 imposed additional voting approval requirements before a local government may impose a tax and also “added to Proposition 13’s limitations on ad valorem property taxes and special taxes similar limitations on assessments, fees, and charges relating to real property.”  Proposition 218 provides “that all general taxes imposed by a local government must be approved by a majority vote of the electorate and all special taxes imposed by a local government must be approved by a two–thirds vote of the electorate.”  However, Proposition 218 “did not define the term ‘tax.’”  Case law subsequently found “that if the primary purpose of a fee is to regulate rather than to raise revenue, the fee is not a tax.”

Proposition 26, approved by California voters on November 2, 2012, “expanded the definition of taxes so as to include fees and charges, with specified exceptions; required a two–thirds vote of the Legislature to approve laws increasing taxes on any taxpayers; and shifted to the state or local government the burden of demonstrating that any charge, levy or assessment is not a tax.”  Due to perceived problems with the imposition of regulatory fees without a two-thirds vote of the Legislature, or voter approval in the case of local governments, Proposition 26 defined the term “tax” as “‘any levy, charge, or exaction of any kind imposed by’ the state or a local government, with specified exceptions.”  The question before the court of appeal was whether the charge for a paper carryout bag is a tax that is therefore subject to voter approval.  The court of appeal held that it is not.  

Subdivision (e) of article XIII C, section 1 provides exceptions to the general rule that a tax is “any levy, charge, or exaction of any kind imposed by a local government.”  Three of these exceptions provide “that a charge imposed by a local government is not a tax if the charge does not exceed ‘the reasonable costs to the local government’ of conferring a specific benefit or privilege directly to the payor or providing a specific service or product directly to the payor, and also except from the definition of a tax a charge ‘for the reasonable regulatory costs to a local government for issuing licenses and permits’ and related activities.”  The court concluded, “These exceptions, generally speaking, except from the definition of a ‘tax’ charges not exceeding the reasonable costs to the local government of providing specific benefits or regulatory services.”  Also, the “exceptions do not contemplate the situation where a charge is paid to an entity or person other than a local government or where such an entity or person incurs reasonable costs.” 

The court opined there is no reason to believe that when voters approved Proposition 26, they “intended to except from the definition of a ‘tax’ and, consequently, from the voter approval requirements” those charges that are payable to a local government but do not exceed “the reasonable costs of providing specific benefits or regulatory activities, but intended the same charges if made payable to another person or entity in an amount not exceeding the reasonable costs to be considered taxes subject to the voter approval requirements.”  The court stated “that the language ‘any levy, charge, or exaction of any kind imposed by a local government’ in the first paragraph of article XIII C, section 1, subdivision (e) is limited to charges payable to, or for the benefit of, a local government.” 

The court concluded that the paper carryout bag charge is not a tax within the meaning of article XIII C of the California Constitution because the charge is payable to the retail store, the funds are retained by the retail store, the Ordinance requires the funds to be used for specified purposes, and the County never receives the funds collected by the retail stores.  Because the charge is not a tax, the voter approval requirements of article XIII C, section 2, do not apply.  Accordingly, the court of appeal affirmed the trial court’s judgment in favor of the County. 

Questions

If you have any questions concerning the content of this Legal Alert, please contact the following from our office, or the attorney with whom you normally consult.

Jeffrey L. Massey | 916.321.4500

Topics:  Local Ordinance, Plastic Bag Bans, Retailers

Published In: General Business Updates, Constitutional Law Updates, Elections & Politics Updates, Tax Updates, Zoning, Planning & Land Use Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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