All summer we have been talking about the fallout from the Supreme Court’s decision in South Dakota v. Wayfair. We analyzed the opinion when it came out; we looked at the initial state responses in August; and we looked at one of the early Federal proposals in September. It’s been an exciting ride!
One of the things we’ve come to realize is that the Wayfair decision signals a convergence of the disparate state nexus thresholds for different types of tax. Correctly or not, the Commerce Clause and Due Process nexus thresholds for sales tax and income tax regimes are converging around the idea that a taxpayer needs to have “minimum contacts” with a taxing jurisdiction and must “purposefully avail” themselves of the jurisdiction’s economic market. Thanks to Public law 86-272 (codified at 15 USC §§ 381-384), nuance still exists in the areas of sales of solicitation of sales of tangible personal property. Also, the requirements of internal and external consistency help limit the deleterious impact of having thousands of taxing jurisdictions each doing their own thing.
The challenge, of course, is that there isn’t a good definition of how to distinguish a “fee” from a “tax.”
Because there are all of these limitations and restrictions on a state’s ability to tax activity within its borders (however that may be defined), states in the last few years have been relying more and more heavily on “fees.” The challenge, of course, is that there isn’t a good definition of how to distinguish a “fee” from a “tax.”
Much like obscenity, jurists tend to think that they should be able to identify a fee when they see it (apologies to Justice Stewart). However, it’s not that simple. A fee payment may be defined as a “fixed charge” or “a sum paid or charged for a service.” From practical perspective, what this means is that specific line items in a governmental budget need to be tied to a charge or schedule of charges. Taxes, on the other hand, are typically understood to be general assessments to pay for government services. Taxes are subject to constitutional limitations. It remains to be seen if the same restrictions apply to fees.
The Oregon Constitution, Article I, §32 states: “No tax or duty shall be imposed without the consent of the people or their representatives in the Legislative Assembly; and all taxation shall be uniform on the same class of subjects within the territorial limits of the authority levying the tax.” At Article IV, §25(2), the Oregon Constitution states: “Three-fifths of all members elected to each House shall be necessary to pass bills for raising revenue.” Courts have generally limited the impact of this to legislation defined as tax increases. There are no corollaries for fees. Certain things, such as state level professional licensure and county inspection services seem directly tied to benefits provided in a way that would be difficult to capture with what we commonly think of as a tax. The bigger issue comes when a fee looks a lot like a tax assessment in disguise.
For example, when the City of Tigard decided that it wanted to enter into a massive water project with the City of Lake Oswego, it was able to enact a rate increase in the guise of a fee to pay for that project. What this meant in practical terms was a hypothetical, impoverished baby lawyer who had only paid $85 every other month for water/sewer service now had to pay that same amount every month. When that hypothetical baby lawyer contacted the City of Tigard to ask why this wasn’t funded through a separate property tax assessment, which would have been more appropriate, she was told that the City didn’t have to go that route so it didn’t. As an aside, it was a pretty facile and not very satisfying answer to provide to a beleaguered, hypothetical baby tax lawyer.
This long-simmering issue has come to a head in the debate over Ballot Measure 104 (“Measure 104”), on the November 6, 2018 ballot. This would add a definition to the Oregon Constitution’s §25 of “raising revenue” to include changes to tax exemptions, credits, and deductions that result in increased state revenue, as well as the creation or increase of state taxes and fees. Interestingly, the impetus for this measure doesn’t seem to be primarily fee increases. Rather, it was Oregon’s nonconformity with the Tax Cuts and Jobs Act’s addition of IRC 199A, which in most cases decreased the effective tax rate on pass through entities.
A recent article by Oregon Public Broadcasting highlights some of the issues associated with Measure 104, including the challenges involved in our system of conformity to the federal definition of taxable income. The authors correctly highlighted the issue that an opt-out of a federal tax exemption could be construed in Oregon as legislation to raise revenue. Therefore, the legislation specifically opting-out of the federal exemption may be seen as revenue raising and subject to a 3/5 majority approval requirement.
Proponents of Measure 104 have argued that politicians have created a climate that is not friendly to taxpayers because it is not predictable how much a taxpayer will have to pay over to state government from one year to the next. Opponents of Measure 104 have made a variety of arguments that mostly seem to come back to “if you pass this, it will tie the hands of legislators to do what needs to be done.” It may be that both sides are correct. At the end of the day, Oregon voters will have to decide how much they trust the politicians (that they elected) to protect both their wallets and the various things that the state does.
Valerie Sasaki specializes in jurisdictional tax consulting, working closely with Fortune 50 companies involved in audits before the Oregon or Washington Departments of Revenue. She also works with business owners on tax, business, and estate planning issues in Oregon or Southwest Washington.