Can an Arkansas city impose a flat monthly water-account charge dedicated to sewer maintenance by ordinance, or does it have to go to a vote of the people?

Plain-English summary

In 2009 the City of Bauxite passed an ordinance adding a flat $10 maintenance charge to every water account in town. The money was earmarked for the sewer plant and sewer pumps. State Representative Kim Hammer asked the AG two questions: did the city council have the authority to enact the charge by ordinance, or did it need a vote of the people? And if the city went the wrong way, was the charge an "illegal exaction" the city would have to refund?

AG Dustin McDaniel's answer turned entirely on whether the charge was, in substance, a fee or a tax. A fee can be imposed by ordinance because the city's authority to charge fees flows from its police powers. A tax has to be approved by the voters because the authority to tax flows from a legislative delegation that requires popular consent under A.C.A. § 26-73-101.

Arkansas courts use a two-part substance-over-label test from City of Marion v. Baioni: a charge is a true fee, not a tax in disguise, when (1) it is fair and reasonable in amount and (2) it bears a reasonable relationship to the benefits conferred on those receiving the services. Courts have applied that test to find supposed "fees" were really taxes when they were used for general municipal revenue or to benefit the public at large rather than the specific payers. Conversely, fees calibrated to the actual cost of providing a discrete service to the payer hold up.

The AG concluded that on the limited record provided, the Bauxite $10 monthly charge was probably a fee. It was modest in amount, and its use was restricted to the water and sewer service the payers received. A court, the AG said, would probably uphold it as a fee in fact, not just in name. Because the charge was probably a fee, no vote was required and the charge could not be challenged as an illegal exaction (illegal-exaction claims require the imposition to be a tax). That mooted the secondary questions about refunds and statutes of limitations.

Currency note

This opinion was issued in 2014. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

What is the line between a tax and a fee in Arkansas under this opinion?
A fee is imposed under the city's police powers and is calibrated to the cost or value of a discrete service the payer receives. A tax is imposed for general revenue purposes under a legislative delegation and requires voter approval. The labels on the ordinance do not control; the substance does.

What's the substance test?
City of Marion v. Baioni (1993) gave Arkansas its two-part test. To qualify as a fee, the charge must be (1) fair and reasonable and (2) bear a reasonable relationship to the benefits conferred on those who receive the services.

What is an "illegal exaction" and why does it matter?
An illegal exaction is either (a) public funds raised from tax dollars being misapplied or illegally spent, or (b) a tax that is itself illegal. Both categories require that the imposition be a tax. If the charge is a fee, it cannot be attacked as an illegal exaction regardless of how it is administered.

Why did the AG hedge instead of giving a clean yes/no?
Because the underlying questions are factual (is the amount fair, does it match the benefit) and the AG had only the representative's brief description to work from. The Arkansas Supreme Court itself called the test's application "not always an easy one for the courts," even with a full evidentiary record. The AG could opine on the likely outcome but not decide the factual questions.

Could a court still throw out the Bauxite charge?
In theory yes, if a challenger showed the $10 was disproportionate to the cost of sewer maintenance or was being diverted to non-sewer uses. The AG's opinion is persuasive, not binding.

What does this mean for other Arkansas city charges?
The same two-part test applies. Cities looking to impose new monthly utility-related charges by ordinance should document the relationship between the charge and the cost of the service it funds, and confine the use of the proceeds to that service. Diverting "fee" proceeds to general revenue is the surest way to flip the charge into a tax in court.

Background and statutory framework

A.C.A. § 26-73-101 reflects the rule that taxes imposed by city ordinance must be approved by the voters. The authority to impose fees, by contrast, stems from a city's police powers as recognized in Morningstar v. Bush, 2011 Ark. 350 ("This court has distinguished between a fee and a tax as government imposes a tax for general revenue purposes, but a fee is imposed in the government's exercise of its police powers.").

City of Marion v. Baioni, 312 Ark. 423 (1993), is the lodestar Arkansas Supreme Court decision on the fee-versus-tax line. Baioni collected illustrative out-of-state cases on both sides of the line. Charges that courts have invalidated as taxes-in-disguise include the Oxnard growth-capital fee (revenue to benefit the community as a whole), the City of Dunedin connection fee (proceeds not limited to expansion costs), the Eastern Diversified development impact fee (funds for roads benefiting the public), the Haugen land-acquisition fee (no direct relationship to division), and the Hillis Homes development fee (primary purpose was revenue, not regulation). Charges courts have upheld as fees include the Amherst Builders $400 sewer tap-in fee and the Hayes v. City of Albany sewer connection fee tied to system construction and expansion.

The illegal-exaction doctrine, as summarized in Morningstar v. Bush, has two prongs: "public funds" cases (tax dollars being misapplied) and "illegal tax" cases (the tax itself is illegal). Both require that the underlying imposition be a tax.

Citations

• A.C.A. § 26-73-101 (city taxes by ordinance require voter approval)
• City of Marion v. Baioni, 312 Ark. 423, 425 (1993) (two-part substance test for fee versus tax)
• Morningstar v. Bush, 2011 Ark. 350 (police-power source of fee authority; illegal-exaction taxonomy)
• Bldg. Ind. Assn. of S. Cal. v. City of Oxnard (2d Dist. 1984) (growth fee held to be a tax)
• Contractors & Builders Assn. v. City of Dunedin, 329 So. 2d 314 (Fla. 1976)
• Eastern Diversified v. Montgomery County, 570 A.2d 850 (Md. 1990)
• Haugen v. Gleason, 359 P.2d 108 (Or. 1961)
• Hillis Homes, Inc. v. Snohomish County, 650 P.2d 193 (Wash. 1982)
• Amherst Builders Assn. v. City of Amherst, 402 N.E.2d 1181 (Ohio 1980) (sewer tap-in fee upheld as fee)
• State ex rel. Waterbury Development v. Witten, 387 N.E.2d 1380 (Ohio App. 1977)
• Hayes v. City of Albany, 490 P.2d 1018 (Or. App. 1971)

Source

• Landing page: https://arkansasag.gov/divisions/opinions-foia/attorney-general-opinions-search/

Original opinion text

Opinion No. 2014-069
September 11, 2014

The Honorable Kim Hammer
State Representative
1411 Edgehill
Benton, Arkansas 72015-3128

Dear Representative Hammer:

You have asked for my opinion about the legality of an ordinance passed in 2009 in the City of Bauxite. You provide the following background for your questions:

"[The ordinance] levied a $10 maintenance fee to be charged on every water account in the City of Bauxite. It is my understanding that the funds are used for the sole purpose of maintenance of the sewer plant and sewer pumps."

With this background in mind, you ask the following questions:

1. Did the [city] council have the authority to establish this fee by ordinance or should it have been voted on in an election of the voters?

2. Could this fee be considered an illegal exaction under Arkansas law?
   a. If this is an illegal exaction, is the City of Bauxite obligated to repay the fee to its citizens?
   b. If this is an illegal exaction, is there a statute of limitations of how far back it would have to be repaid?

RESPONSE

If the $10 maintenance fee truly is a "fee" (instead of a tax), then the City had the authority to impose it via an ordinance. In that case, the fee could not be considered an "illegal exaction," because a threshold criterion for an illegal-exaction analysis is that the imposition be a tax. Thus, the answer to your questions turns on whether the imposition truly is a fee. Though, for the reasons explained below, I cannot be definitive, it seems from the limited information provided to me that the maintenance fee is most likely a fee (not a tax). Therefore, in response to your first question, the City in all likelihood had the authority to impose the fee via an ordinance. Consequently, in response to your second question, the fee is not subject to challenge as an illegal exaction.

DISCUSSION

In order to answer your questions, we must distinguish between a tax and a fee. A fee can be validly imposed by ordinance, but an ordinance levying a tax (if it is to be valid) must be adopted by the voters. This difference is grounded in the source of the city's authority to exact the two kinds of moneys: the authority to exact fees stems from a city's police powers, whereas the authority to exact taxes stems from a delegation by the legislature.

The city's ordinance at issue here is clearly labeled a "fee." But when assessing the validity of a purported fee, courts will look beyond the label to the nature of the imposition itself. In "order for a fee not be denominated a tax," the fee must be (1) "fair and reasonable" and (2) "bear a reasonable relationship to the benefits conferred on those receiving the services." While the test for assessing a fee is clear, the Arkansas Supreme Court has noted that the test's "application is not always an easy one for the courts."

In City of Marion v. Baioni, the Arkansas Supreme Court collected several cases in other jurisdictions to show the range of fact patterns that can arise together when assessing purported fees:

The following impositions were labeled fees but were declared to be taxes:

Bldg. Ind. Assn. of S. Cal. v. City of Oxnard, (2d Dist. 1984) (a growth requirement capital fee applicable to new development held a tax because the fee was designed to collect revenues to benefit the community as a whole); Contractors & Builders Assn. v. City of Dunedin, 329 So. 2d 314 (Fla. 1976) (connection fees to expand water and sewage systems held a tax because the use of the money collected was not limited to the costs of expansion); Eastern Diversified v. Montgomery County, 570 A.2d 850 (Md. 1990) (development impact fees to raise funds to finance construction of roads held a tax because funds benefited general public); Haugen v. Gleason, 359 P.2d 108 (Or. 1961) (land acquisition fee held tax because the use of money produced no direct benefit or relationship to the new division); Hillis Homes, Inc. v. Snohomish County, 650 P.2d 193 (Wash. 1982) (development fees imposed on new residential subdivisions constituted taxes because the primary purpose was to raise money not regulate land subdivision)

The following impositions were labeled fees and confirmed to be fees:

Amherst Builders Assn. v. City of Amherst, 402 N.E.2d 1181 (Ohio 1980) (sewer tap-in or connection fees of $400 for single family homes of new users upheld as valid fee, not a tax) but see State ex rel. Waterbury Development v. Witten, 387 N.E.2d 1380 (Ohio App. 1977) (water tap-in fee of $720 held a tax because it exceeded cost of service provided new users); Hayes v. City of Albany, 490 P.2d 1018 (Or. App. 1971) (sewer connection fee of $255 for a single family dwelling for construction and expansion of sewer system held valid because proceeds must be used directly in development and maintenance of sewer system).

In these cases, the purported fee was upheld when it was consistent with the actual costs of the service for which the fee was payment and when the City limited the fee's use to the service/system paid for.

In your background facts, you say that the City of Bauxite ordinance established a $10 maintenance fee to be charged on every water account in the City of Bauxite and that the fee was to be "for the sole purpose of maintenance of the sewer plant and sewer pumps." It is a question of fact (1) whether a fee is fair and reasonable and (2) whether it bears a reasonable relationship to the benefits conferred on those receiving the services. And as the Arkansas Supreme Court noted, courts themselves have a difficult time applying these questions despite the fact that they have the benefit of a full record, evidence, and the adversarial system.

As I lack these benefits, I am in an even more difficult position. Accordingly, the most I can say is that based on the limited information before me, the $10 monthly fee seems reasonable and its use seems restricted to the benefits conferred on those who receive the service: namely, water and sewer services. Therefore, in my opinion, a court faced with your question would probably find that the imposition is a fee in fact, not just in name. Accordingly, the City was not required to submit the ordinance to a vote.

This conclusion has implications for your second question. Because the imposition is probably a fee, it is not subject to attack as an illegal exaction. This is because one prerequisite to an illegal-exaction challenge is that the government imposition be a tax. Therefore, based on my answer to your first question, the answer to your second question is "no," which moots your second question's subparts.

Assistant Attorney General Ryan Owsley prepared this opinion, which I hereby approve.

Sincerely,
DUSTIN MCDANIEL
Attorney General
DM/RO:cyh