State Supreme Court Opens Door for Taxpayers to Challenge Levies
Throwing into question utility users' taxes collected by many cities, the state Supreme Court has overturned a lower court's ruling that a lawsuit challenging a city's utility users' tax was filed too late. The state's high court ruled unanimously that the three-year statute of limitations begins anew every time the city collects the tax.
Relying on Proposition 62 from 1986, which required voter approval of general taxes imposed by local governments, the Howard Jarvis Taxpayers Association challenged a City of La Habra levy. A total of 156 cities levy a utility users' tax, which is typically a small percentage of monthly electric bills. Some of those taxes were imposed before Proposition 62, some were approved by voters as required by Proposition 62 and some were approved by voters under the dictates of Proposition 218, said Megan Taylor, a spokeswoman for the League of California Cities. The League was still trying to determine the scope of the ruling, she said. Some utility users' taxes provide up to a quarter of a city or county's general fund revenue.
Jarvis attorney Timothy Biddle said he expects more aggrieved taxpayers will now sue to force an election on general taxes that voters never approved.
"The upshot of the La Habra case is that if you are somebody who has paid a tax recently, you can challenge it in court," Biddle said. Previously, courts had held that taxpayers had to file suit within three years of a tax's enactment.
The Jarvis group appears to have gained the upper hand in a similar suit pending against Sacramento County. And it is likely that the state Supreme Court will direct the Sixth District Court of Appeal to reconsider its unpublished rulings that upheld similar taxes in the cities of Santa Cruz and Watsonville, and in Santa Cruz County.
In December 1992, the La Habra City Council adopted an ordinance establishing a utility users' tax to raise general fund revenue. The measure became operational May 1, 1993, when tax collection commenced. Up to that date, two appellate court panels had held that Proposition 62 was unconstitutional. Relying on those decisions, the city did not submit its utility users' tax to voters. However, in September 1995, the California Supreme Court upheld the constitutionality of Proposition 62 in Santa Clara County Local Transportation Authority v. Guardino, (1995) 11 Cal.4th 220 (see CP&DR Legal Digest, November 1995). In that case, the Supreme Court invalidated a tax imposed without voter consent.
In March of 1996, the Jarvis group filed a lawsuit against La Habra and Orange County. The city demurred, in part because of the three-year statute of limitations. Orange County Superior Court Judge Ronald Kline ruled for the city.
On appeal, Jarvis relied heavily on McBrearty v. City of Brawley, (1997) 59 Cal. App.4th 1441. The McBrearty court concluded that an exception to the three-year statute of limitations was warranted to prevent an injustice. The court in McBrearty also said it was understandable citizens would not file lawsuits because the precedent prior to Guardino was against Proposition 62.
But the Fourth District Court of Appeal panel in the La Habra case called the McBrearty opinion "flawed." The State Supreme Court in Monroe v. Trustees of the California State Colleges (1971) 6 Cal.3d 399, concluded that "the mere existence of a contrary precedent" does not alter the statute of limitations. To rule otherwise would allow litigation every time a precedent changed. Thus, the three-year statute must be upheld, the appellate panel ruled.
In overturning the appellate court, the state Supreme Court did not accept Jarvis's argument that it was delayed from suing La Habra until the Guardino ruling. Instead, the high court accepted the argument that the city's collection of a general tax without voter approval was a violation of Proposition 62 that continuously provided grounds for a lawsuit.
The city did not dispute that it failed to comply with Proposition 62. Instead, it argued that Jarvis had to file its lawsuit within three years of the City Council's adoption of the tax. Jarvis missed that date by about one year. The city argued that Jarvis was attacking the enactment of the ordinance, not the actual collection of the tax. Even Jarvis conceded to the state Supreme Court that the group was not seeking a refund of taxes already paid.
But the court concluded that the lack of a refund claim did not matter.
"[P]laintiffs have alleged an ongoing violation of Proposition 62's commands, for which they seek relief in mandamus, and a presently existing actual controversy between themselves and the City over the validity of the utility tax, which they seek to resolve by declaratory judgment; those causes of action are not barred merely because similar claims could have been made at earlier times as to earlier violations, or because plaintiffs do not at this time also seek a refund of taxes paid," Justice Kathryn Werdegar wrote for the court.
Proposition 62 (Gov. Code §§ 53720-53730) requires that general taxes adopted prior to the proposition's passage in November 1986 be approved by voters by November 1988, the court noted. If a city refuses to comply, the measure directs county officials to withhold property taxes from cities in an amount equal to the illegal tax. "Clearly the intent of Proposition 62's enactors was not merely to preclude enactment of a tax ordinance without voter approval, but to preclude continued imposition or collection of such a tax as well," Werdegar wrote.
The court also pointedly addressed the concern — noted in amicus briefs from nearly 200 cities and counties — that starting the three-year statute of limitations anew every time a tax is imposed would destabilize financial planning.
"The local governments' suggestion, 14 years after the passage of Proposition 62 and five years after Guardino's resolution of the constitutional questions, that their budgetary planing process will be disrupted if Proposition 62's requirements are enforced, is not well taken. Cities and counties must eventually obey the state laws governing their taxing authority and cannot continue indefinitely to collect unauthorized taxes," Werdegar wrote.
"Moreover," she continued, "our holding relates only to injuries occurring in the statutory three-year period before suit is brought and applies only to plaintiffs injured by tax collections within the three-year period. The legitimate public interest in stability of municipal finance is not imperiled."
The Case:
Howard Jarvis Taxpayers Association v. City of La Habra, No. S082591, 01 C.D.O.S. 4539, 2001 DJDAR 5565. Filed June 4, 2001.
The Lawyers:
For Jarvis: Timothy Biddle, (916) 444-9950.
For La Habra, Richard D. Jones (714) 446-1400.