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Health & Fitness

Government Fees Can Be Taxing

The Ohio Supreme Court throws out taxes masquerading as "development fees."

If you ask a politician to identify the dirtiest word in the English language, he or she will probably tell you the word is “tax.” To avoid using that word, government officials have become increasingly creative about finding other methods of raising money.

A favorite tactic at the local level is to replace taxes with “fees.” The city does not tax you for collecting your trash; you pay a trash collection fee. It does not tax you for maintaining the sewer system. You pay a sewer use fee. By doing this, the government can collect the money that it needs, while keeping your “taxes” lower.

However, a local government cannot evade the legal limit on its taxing authority by simply calling every new tax a “fee.” In a recent case, the Ohio Supreme Court ruled that a township’s “development impact fee” was really an illegal tax.

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In 2007, Hamilton Township announced a series of “fees” for constructing new buildings or redeveloping older properties. These fees were supposed to offset the increased cost of services and improvements required because of the new development.

Developers now had to pay a road-impact fee, a fire-protection-impact fee, a police-protection-impact fee, and a park-impact fee. When totaled up, the fees increased the cost of a new single-family house by over $6,000. The cost for retail and commercial construction was even higher, almost $8,000 per 1,000 square feet.

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Several developers paid the fees under protest, then sued Hamilton Township, claiming that the   “fees” were actually taxes that the Township was not authorized to collect.  There was no dispute that the charges were illegal under Ohio law, if they were taxes.

The case eventually landed in the Ohio Supreme Court, which threw out the disputed charges. The Court found that the charges were in fact taxes, rather than fees, based on three factors:

First, the charges were not used to address any problem specifically created by the developers. If, for example, a city imposes a charge for the installation of underground tanks to pay for the cost of monitoring the tanks or cleaning up spills, that is a legitimate fee. However, a charge to pay for an increase in basic city services is a tax.

Second, the money from the charges went into the Township’s general fund. Although the money was kept in a separate account, the money was still used to pay for services that benefited the general population of the entire Township. That is part of the definition of a tax.

Third, the developers did not receive additional services or improvements in return for their extra payments. As residents of the Township, the developers were already entitled to the same benefits as any other citizen, including police and fire protection, the use of the roads and the use of the parks. The Township could not charge the developers an extra “fee” for things that everyone else paid for with “taxes.”

Since the Township’s charges looked like a tax in every relevant way, and since the Township was not authorized to levy a development impact “tax” under state law, the Supreme Court ruled that the taxes were not legal.

One note, though, Hamilton Township is a “limited home-rule” entity with strictly defined taxing powers. Municipal corporations have broader powers, and their taxing authority may be different.

Nonetheless, if you have noticed a rash of new fees in your area, you might want to read Justice Paul Pfeifer’s excellent explanation of the difference between a fee and a tax. You can download his opinion in the case of Drees Co. v. Hamilton Township at http://www.supremecourt.ohio.gov/rod/docs/pdf/0/2012/2012-Ohio-2370.pdf

Have a question or a suggestion for a topic?  Email dspirgen@SpirgenLawFirm.com.

Patch posts are general discussions and should not be used as advice on any specific legal matter.  If you need legal advice on a particular situation, please consult an attorney.

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