Victory in the Heartland: NFIB Legal Center Helps Strike Down an Illegal Municipal Tax

Date: July 22, 2015

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Last summer the NFIB Small Business Legal Center filed in support of a group of landowners in their legal challenge to a municipal ordinance that required them to pay an annual fee to help cover the City’s costs in maintaining public roads. Though labeled a “fee,” the truth is that this was an illegal tax. And small business owners were carrying the brunt of the financial burden—with some small businesses paying more than $16,000 annually for their commercial properties.

The good news is that the Court of Appeals in Kansas recently issued an opinion, in Heartland Apartment Association v. City of Mission, agreeing with us, and striking down the illegal tax: “Because this fee is a forced payment by all improved landowners which is used for the governmental service of providing for public streets and bridges, used by all, we hold [the City’s] transportation user fee is a tax.” And this is just the latest in our on-going efforts to enforce strict limitations on state and local taxing powers.

Because folks are understandably concerned about over taxation, the citizens of almost every state in the union have adopted constitutional checks on their government’s taxing powers. In addition, state law makers may choose to further restrict the prerogative of local municipalities to impose taxes. Of course, we often see government actors seeking to find ways to exact money from the public by mischaracterizing their schemes as imposing fees—going out of the way to avoid the “tax” label. That is because these taxpayer protections generally make it harder to impose taxes by requiring super majority votes, explicit taxpayer approval in a public vote, or other procedural hoops. But when that happens, it’s important that court’s see past the labels used. As the Kansas courts did in this case, we should ask whether the exaction is truly a fee, or if it is really a scheme to force some in the community to cover general costs that should more fairly be borne by the whole community. 

It can sometimes be difficult to distinguish a fee from a tax, and state courts vary in their approach. But the Heartland decision adds to the growing weight of authority holding that an exaction must be classified as a tax if its proceeds are used for projects benefiting the general community—as opposed to directly offsetting costs that that the payer has imposed on society, or recouping the direct costs the government has incurred in conferring a specific benefit. But rest assured, we will continue to weigh-in on these issues as we see them percolating through the courts because someone must hold government accountable.

Finally, its also important to recognize that there are meaningful constitutional protections that limit what sort of fees government can impose on you. Many states require that fees must be proportionate to the actual costs the government has incurred in performing a service. But there are also constitutional protections. In 2013 we helped secure a major win for property rights in the case of Koontz v. St. John River Management District, which held that monetary fees imposed as a condition of receiving a building permit must bear a nexus to some adverse impact that your project might have on the public—and must be roughly proportionate to the costs your project will impose on the public. Suffice it to say, government cannot impose any fee it should like as a condition of approval of a permit.

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