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When is a fee a fee, and a tax a tax?
Posted onOne of the issues raised in the Northwest Energetic Services case mentioned in my last post, is the question of “when is a fee really a fee, and when is a fee really a tax?”
Norrthwest’s attorney, Amy Silverstein, of Silverstein & Pomerantz, LLP in San Francisco, argued that the “fee” imposed by California was an attempt to replace lost revenue that the Legislature thought would occur with the passage of the California LLC Act in 1994. Because the Legislature thought they would lose revenues due to the tax intricacies of LLC flow-through status, they had imposed two revenue-generating provisions: an LLC annual “tax”, and the LLC annual “fee”. But, just because it is called a “fee” doesn’t make it a “fee”.
What is a Tax? Previously, the California Supreme Court had ruled that “the essence of a tax is that it raises revenue for general governmental purposes and is ‘compulsory rather than imposed in response to a voluntary action‘”.
What is a Fee? A fee must fund a regulatory program or compensate for services provided by, and/or benefits received from, the government. It is imposed in response to a voluntary action, and is NOT compulsory.
When a “fee” bears no relationship to benefits received or burdens imposed by the payor, it is not really a fee. It is a tax. Moreover, when the amount of a fee exceeds the amount reasonably necessary to cover the costs incurred by the government to provide benefits, the excess is also a tax and not a fee.