City of Huntington v. Bacon

The two cases before us were consolidated for argument and opinion. In the first case, the appellants, John Bacon, Carole Bacon, and other owners of buildings in the City of Huntington (hereinafter “the Bacons”) appeal the April 25, 1995 order of the Circuit Court of Cabell County which granted summary judgment for the City of Huntington. In the second case, the Circuit Court of Cabell County certified a question to this Court from a declaratory judgment action in which the City of Huntington (hereinafter “City”) and the Cabell County Board of Education (hereinafter “Board of Education”) are parties. 1

Both cases involve the resolution of the following issue: Whether the City’s municipal service fee imposed upon owners of buildings at an annual rate plus a percentage based upon the square footage of space contained in each structure on the lot in order to defray the cost of fire and flood protection services is a fee or tax. For reasons explained below, we find the municipal service fee to be a fee and not a tax.

I.

In order to facilitate an understanding of how the two cases arose, a history of the municipal service fee in Huntington needs to be discussed. Furthermore, the procedural history of each case should be noted.

A.

History of the municipal service fee

In 1990 the City passed an ordinance imposing a municipal service fee in order to defray the cost of providing fire and flood protection services:

On or after July 1, 1990, there is hereby imposed upon all users of Municipal services a municipal service fee for each lot or parcel of land containing any building or structure owned by each user. The fee shall be imposed at an annual rate of seventy dollars ($70.00) per lot plus $0.0375 per square foot of floor space contained in each budding or structure existing on each such lot. 2

Ordinance § 773.03 (footnote added). The term “user” in the above ordinance is defined in the following manner:

For purposes of this article, ‘user of municipal services’ and ‘user’ refers to any person, firm, corporation or governmental entity of any kind owning any budding or structure, whether residential, commercial, governmental or otherwise, within the limits of the City which benefits from fire and/or flood protection services provided by the City.

Ordinance § 773.02.

In .1991 the City amended ordinance § 773.03 by increasing the rate to $80.00 per lot and $0.0575 per square foot. Additionally, that amendment allocated $250,000.00 of the municipal service fee collected between 1991 and 1994 to the improvement of streets and municipal infrastructure. According to the City, since 1994, the municipal service fee is no longer being used to improve streets and municipal infrastructure.

B.

The Bacons

The City filed suit against the Bacons in order to collect the municipal service fee assessed against them. The Bacons maintained they were not required to pay the municipal service fee because the fee was a tax which violated the Tax Limitation Amendment found in W. Va. Const. Art. X, *462 § l. 3 The Bacons relied, inter alia, upon United States v. City of Huntington, 999 F.2d 71 (4th Cir.1993), cert. denied, 510 U.S. 1109, 114 S.Ct. 1048, 127 L.Ed.2d 371 (1994), which held the municipal service fee was a tax which an agency of the federal government was not obligated to pay pursuant to the Supremacy Clause of the Constitution of the United States. 4 More specifically, the Bacons argued that the City of Huntington case collaterally estops the City from raising the issue of whether the municipal service fee is a tax or fee in state court.

The circuit court disagreed and concluded that the municipal service fee was a user fee which the City properly imposed upon the Bacons pursuant to W. Va.Code, 8-13-13 [1971]. Thus, the circuit court granted the motion for summary judgment by the City thereby ordering the Bacons to pay the municipal service fee.

The Bacons have filed the appeal now before us asserting that the application of the doctrine of collateral estoppel mandates the circuit court to uphold the Fourth Circuit’s determination that the municipal service fee is a tax in violation of the Tax Limitation Amendment of our State Constitution. In the alternative, the Bacons maintain that the municipal service fee is a tax pursuant to state law which also violates the Tax Limitation Amendment. Lastly, the Bacons assert that even if the municipal service fee is a fee, it is unreasonably applied to them.

c.

Cabell County Board of Education

On February 16, 1989, the City brought a declaratory judgment action pursuant to W.Va.Code, 55-13-1 [1941] in order to seek a declaration of its rights to recover certain municipal fees assessed against the Board of Education. On June 22, 1995, the Circuit Court of Cabell County, sua sponte, issued an order certifying the following question to this Court: “May the City of Huntington continue to impose its Municipal Service Fee for Fire and Flood protection upon the Board of Education of Cabell County, West Virginia in light of [United States v. City of Huntington, 999 F.2d 71 (4th Cir.1993) ]?”

The circuit court answered the question in the affirmative, holding that the City of Huntington ease from the Fourth Circuit Court of Appeals did not bar the City from seeking the municipal service fee from the Board of Education. Implicitly, the circuit court determined the municipal service fee was a fee and not a tax. Thus, the circuit court concluded the fee could be assessed against the Cabell County Board of Education.

The Board of Education, in the action now before us, maintains that the municipal service fee is a tax (either because the collateral estoppel doctrine mandates the circuit court to apply the Fourth Circuit’s holding or because of state law) which it is exempt from paying pursuant to W. Va. Code, 11-3-9 [1990]. 5 The Board of Education also main *463 tains that even if the municipal service fee is found to be a fee, there is no legislative enactment obligating it to pay such a fee.

II.

At the outset, we note that “[a] circuit court’s entry of summary judgment is reviewed de novo.” Syllabus point 1, Painter v. Peavy, 192 W.Va. 189, 451 S.E.2d 755 (1994). See also syl. pt. 1, Jones v. Wesbanco Bank Parkersburg, 194 W.Va. 881, 460 S.E.2d 627 (1995) and syllabus point 1, State v. Morgan Stanley Co., Inc., 194 W.Va. 163, 459 S.E.2d 906 (1995). Additionally, we have stated that “we retain some flexibility in determining how and to what extent ... [a certified question from a circuit court to us] will be answered.” City of Fairmont v. Retail, Wholesale, & Dept. Store Union, 166 W.Va. 1, 3-4, 283 S.E.2d 589, 590 (1980), citing West Virginia Water Service Co. v. Cunningham, 143 W.Va. 1, 98 S.E.2d 891 (1957). See also syl. pt. 3, Kincaid v. Mangum, 189 W.Va. 404, 432 S.E.2d 74 (1993).

Although the Bacons and Board of Education raise different arguments, there essentially are three common issues which must be resolved in these consolidated cases: (1) Does collateral estoppel apply; (2) Is the municipal service fee a fee or tax pursuant to state law; and (3) Does the municipal service fee reasonably serve the purpose for which it was enacted?

A.

Collateral Estoppel

As we have previously discussed, the Fourth Circuit in City of Huntington determined that the municipal service fee presently at issue to be a tax. The first issue on appeal is whether the Fourth Circuit’s holding collaterally estops the City from arguing that the municipal service fee is a fee.

We begin our analysis with a brief discussion of the collateral estoppel doctrine. The purpose of the collateral estoppel doctrine is “to foreclose relitigation of issues in a second suit which have actually been litigated in the earlier suit even though there may be a difference in the cause of action between the parties of the first and second suit.” Syl. pt. 2, in part, Conley v. Spillers, 171 W.Va. 584, 301 S.E.2d 216 (1983). We have outlined four conditions which must be met before collateral estoppel will bar a claim in syllabus point 1 of State v. Miller, 194 W.Va. 3, 459 S.E.2d 114 (1995):

Collateral estoppel will bar a claim if four conditions are met: (1) The issue previously decided is identical to the one presented in the action in question; (2) there is a final adjudication on the merits of the prior action; (3) the party against whom the doctrine is invoked was a party or in privity with a party to a prior action; and (4) the party against whom the doctrine is raised had a full and fair opportunity to litigate the issue in the prior action.

(emphasis added). See also syl. pt. 6, Conley, supra. In the case before us, the focus is on the first condition of collateral estoppel. We have stated that an analysis of the first condition involves not only a determination of whether the facts are similar, but also a determination of whether the legal standards and procedures used to assess the facts are similar. Miller, 194 W.Va. at 10, 459 S.E.2d at 121.

With this in mind we will examine the history of the City of Huntington case in order to determine whether the collateral estoppel doctrine is applicable. The case arose in the Fourth Circuit Court of Appeals after the United States filed a complaint in the United States District Court seeking an injunction in order to prohibit the City from imposing the municipal service fee on the United States Postal Service and the United States General Services Administration. United States v. City of Huntington, 793 F.Supp. 1370 (S.D.W.Va.1992). The United States sought a declaration that the assessed fee was a tax which it was not obligated to pay pursuant to the Supremacy Clause of the Constitution of the United States. Id. The district court concluded that the City of Huntington’s municipal service fee was a user fee which the federal government agencies had to pay. 6

*464 The United States Court of Appeals of the Fourth Circuit reversed the United States District Court’s decision. United States v. City of Huntington, 999 F.2d 71 (4th Cir. 1993). In so ruling, the Court of Appeals noted the following definitions of fee and tax: “User fees are payments given in return for a government-provided benefit. Taxes, on the other hand, are ‘enforced contribution[s] for the support of government.’ ” Id. at 74 (citations omitted). The court went on to state “[l]iabi]ity for the ‘user fee’ charged by the City arises from ... [the United State’s] status as [a] property owner[ ] and not from ... [its] use of a City service.” Id. at 74 (footnote omitted). The Court of Appeals concluded there was no “relevant difference between the square-footage method of assessment [which is how the municipal service fee is assessed] and the ad valorem method [which is a tax based upon the value of property].” Id. at 74.

The Bacons and the Board of Education maintain that the issue before the Fourth Circuit regarding whether the municipal service fee is a tax or fee is exactly the same issue before the circuit court in each of their respective cases. Moreover, the Bacons and the Board of Education assert that the legal principles have not changed since the Fourth Circuit addressed the issue.

Conversely, the City argues that the Fourth Circuit decided a different issue. More specifically, the City maintains that the issue before the Fourth Circuit was whether the municipal service fee was a tax which the City could not impose on a federal entity pursuant to the Supremacy Clause of the Constitution of the United States. The City maintains that because neither the Bacons nor the Board of Education is entitled to any immunities under the Constitution of the United States, the Fourth Circuit’s holding is not applicable to them. We agree.

The Supreme Court of the United States has made clear that the states are free to chose their own fiscal policies: “The State is left to choose its own methods of taxation and its form and manner of enforcing the payment of the public revenues, subject, so far as the Federal power is concerned, to the restricting regulations of the Constitution of the United States.” Kentucky Union Co. v. Kentucky, 219 U.S. 140, 151, 31 S.Ct. 171, 176, 55 L.Ed. 137, 154 (1911). See also Wisconsin v. J.C. Penney Co., 311 U.S. 435, 444, 61 S.Ct. 246, 249-50, 85 L.Ed. 267, 270 (1940) (“A state is free to pursue its own fiscal policies, unembarrassed by the Constitution, if by the practical operation of a tax the state has exerted its power in relation to opportunities which it has given, to protection which it has afforded, to benefits which it has conferred by the fact of being an orderly, civilized society.”).

The only limitations the Supreme Court of the United States may impose upon a state’s power to determine its own fiscal policies are those expressed in the Constitution of the United States. Kentucky Union Co., supra. One such limitation expressed in the Constitution of the United States is that the federal government is not subject to any taxation by a state or political subdivision unless explicitly authorized by Congress. See McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316, 4 L.Ed. 579 (1819) and United States v. Harford County, 572 F.Supp. 239 (Dist.Ct.Md.1983). Therefore, where a federal entity is involved, the federal courts may determine whether a particular funding mechanism employed by a state or its political subdivision is, in fact, a tax: “Where a federal right is involved, a federal court is not bound by the characterization given to a state tax by a state court nor relieved from the duty of considering the real nature of the tax and its effect on the federal right asserted.” Harford County, 572 F.Supp. at 242 *465 (citing Carpenter v. Shaw, 280 U.S. 363, 367-68, 50 S.Ct. 121, 122-23, 74 L.Ed. 478, 482 (1930); United States v. Allegheny, 322 U.S. 174, 184, 64 S.Ct. 908, 914, 88 L.Ed. 1209, 1217 (1944)).

It follows, therefore, that a state is not bound by a federal court’s characterization of a state tax or fee when a federal right is not involved. After all, as we have previously stated, states are free to determine their own fiscal policy as long as the fiscal policy does not violate the Constitution of the United States. Kentucky Union Co., supra.

Accordingly, the circuit court properly determined that the Bacons and the Board of Education could not assert collateral estoppel in the cases before us, as the issue resolved by the Fourth Circuit in City of Huntington, supra, clearly differs from the issues now pending. See syl. pt. 1, Miller, supra. Therefore, we must address the issue of whether the City’s municipal service fee is a tax or a fee pursuant to state law. 7

B.

Municipal service fee is a user fee

The City derives all of its power as well as its existence from the legislature:

‘Municipalities have no inherent power with regard to the exercise of the functions of their government. Such power depends solely upon grants of power by Acts of the Legislature, and the Legislature may at any time modify, change or withdraw any power so granted by general law in conformance with the provisions of the Constitution, Article VI, Section 39(a).’ 8 Point 2, Syllabus, State ex rel. Alexander v. The County Court of Kanawha County, et al., 147 W.Va. 693[, 130 S.E.2d 200 (1963)].

Syl. pt. 1, State ex rel. Plymale v. City of Huntington, 147 W.Va. 728, 131 S.E.2d 160 (1963) (footnote added). See also syl. pt. 1, Toler v. City of Huntington, 153 W.Va. 313, 168 S.E.2d 551 (1969); syl. pt. 1, Chesapeake & Potomac Telephone Co. v. City of Morgantown, 144 W.Va. 149, 107 S.E.2d 489 (1959). Cf. syllabus point 1, in relevant part, Hukle v. City of Huntington, 134 W.Va. 249, 58 S.E.2d 780 (1950) (Because a municipality has no inherent power to levy taxes, the municipality may only do so pursuant to the authority granted to it by the legislature). Therefore, the City only has the authority to impose the fees or taxes which are authorized by the legislature. Id. See also W. Va. Const. Art. X, § 9. 9 The legislature specifically authorized municipalities “to impose by ordinance upon the users of [‘essential or special municipal service, including, but not limited to, police and fire protection ... and any other similar matter’] reasonable rates, fees and charges to be collected in the manner speci *466 fied in the ordinance[.]” W. Va.Code, 8-13-13 [1971], in relevant part (emphasis added). It was pursuant to the authority conferred upon it by W. Va.Code, 8-13-13 [1971] that the City imposed its municipal service fee for fire and flood protection services.

Though the above language employed by the legislature in W. Va.Code, 8-13-13 [1971] suggests that the legislature intended the charges imposed on the users of essential or special municipal services to be user fees rather than taxes, this Court has held “[t]he character of a tax is determined not by its label but by analyzing its operation and effect.” Syl. pt. 2, City of Fairmont v. Pitrolo Pontiac-Cadillac, 172 W.Va. 505, 308 S.E.2d 527 (1983), cert. denied, 466 U.S. 958, 104 S.Ct. 2169, 80 L.Ed.2d 553 (1984) (em phasis added). See also syl. pt. 2, Solid Waste Authority v. Division of Natural Resources, 195 W.Va. 1, 462 S.E.2d 349 (1995) and Hukle, 134 W.Va. at 255, 58 S.E.2d at 783 (“It is well-nigh universal principle that courts will determine and classify taxation on the basis of realities, rather than what the tax is called in the taxing statute or ordinance.” (citation omitted)). However, “it is difficult to categorize an assessment as a fee or a tax because the courts have not adopted universal definitions of these terms.” Solid Waste Authority, 195 W.Va. at 5, 462 S.E.2d at 353.

Nevertheless, in recognition of the legislature’s constitutional power to determine this State’s fiscal policy, this Court has accorded it and municipalities wide latitude in how they choose to fund municipal services, such as those for fire and flood protection. See W. Va. Const. Art. VI, § 51; Art. X, § 3; and Art. X, § 5. The legislature’s power to determine this State’s fiscal policy is limited only by the Constitution. See also syl. pt. 3, State ex rel. Lambert v. County Comm’n, 192 W.Va. 448, 452 S.E.2d 906 (1994) (This Court must use every reasonable construction of a legislative enactment in order to sustain its constitutionality).

Thus, the role of this Court is to examine the “operation and effect” of a charge imposed for a service by a municipality pursuant to the legislature’s authorization in W. Va.Code, 8-13-13 [1971] to determine whether the charge violates a constitutional provision. See syl. pt. 2, City of Fairmont, supra. We are less concerned with the label of the charge and more concerned with upholding our Constitution.

Though our case law reveals a somewhat convoluted history in the area of taxes and fees, this Court has generally operated on the premise that charges for services rendered by a municipality are user fees and not taxes. See City of Charleston v. Board of Education, 158 W.Va. 141, 145, 209 S.E.2d 55, 57 (1974) (the charge for fire protection is a fee and not a tax); City of Moundsville v. Steele, 152 W.Va. 465, 164 S.E.2d 430 (1968) (charge of $0.25 per front foot for street improvement is a fee and not a tax); and Duling Bros. Co. v. City of Huntington, 120 W.Va. 85, 89-90, 196 S.E. 552, 554-55 (1938) (charges for a flood control program are not subject to ordinary taxing regulations). This premise is based on the following definitions of tax and fee: “[T]he primary purpose of a tax is to obtain revenue for the government, while the primary purpose of afee is to cover the expense of providing a service or of regulation and supervision of certain activities.” River Falls v. St. Bridget’s Catholic Church, 182 Wis.2d 436, 513 N.W.2d 673, 675 (App.1994) (citing State v. Jackman, 60 Wis.2d 700, 211 N.W.2d 480, 485 (1973) and emphasis added).

On the other hand, where the “operation and effect” of a service charge appears to impose a tax, then this Court examines the service charge more closely. For example, in City of Fairmont v. Pitrolo Pontiac-Cadillac, 172 W.Va. 505, 308 S.E.2d 527 (1983) this Court found the police service charge imposed by the City of Fairmont to be an ad valorem tax which violated the Tax Limitation Amendment found in W. Va. Const. Art. X, § 1 rather than a user fee. We determined that the “operation and effect” of the police service charge was the same as the “operation and effect” of an ad valorem tax because the police service fee, like an ad valorem tax, was imposed according to the value of the property. Id. at syl. pts. 1 and 3. See also Hare v. City of Wheeling, 171 W.Va. 284, 298 S.E.2d 820 (1982) (A police *467 service charge imposed upon owners of property by the City of Wheeling based upon the value of property as determined by the books of the county assessor is, in fact, an ad valorem tax which violates W. Va. Const. Art. X, § 1 rather than a user fee).

Conversely, if the “operation and effect” of the service charge imposed by a municipality does not give the appearance of being a tax, and if an ordinance enacted pursuant to W. Va.Code, 8-13-13 [1971] “reasonably serves the purpose for which it was enacted,” then this Court will defer to the municipality’s wisdom in imposing the service charge. Ellison v. City of Parkersburg, 168 W.Va. 468, 472, 284 S.E.2d 903, 906 (1981).

In the case before us, the Bacons and the Board of Education maintain the City’s municipal service fee is, in fact, an ad valorem tax because the rate of the fee is based upon the square footage of space contained in each structure. In syllabus point 3 of City of Fairmont, supra, we held: “The essential characteristic of an ad valorem tax, as its name suggests, is that the tax is levied according to the value of the property. Also, assessment on a regular basis is a common characteristic.” Although the City’s municipal service fee is assessed on a regular basis, it is not based upon the value of the property. Under the language of the municipal service fee ordinance, a building worth several million dollars which has the same square footage as a building worth a fraction of that would be assessed identical municipal service fees. By imposing a charge based upon a structure’s square footage, the City creatively avoided the results in City of Fairmont. However, the square footage assessment does not make the municipal service fee, in fact, an ad valorem tax.

The Bacons and the Board of Education also argue that the municipal service fee falls within the traditional definition of a property tax: “‘The consensus of opinion appears to be that a property tax is a charge on the owner of property by reason of his ownership alone without regard to any use that might be made of it, Bromley v. McCaughn, 280 U.S. 124, 136, 50 S.Ct. 46 [, 47], 74 L.Ed. 226 (1929)[.] ” City of Fairmont, 172 W.Va. at 509, 308 S.E.2d at 531 (quoting Weaver v. Prince George’s County, 281 Md. 349, 379 A.2d 399, 403-04 (1977) and citations omitted). The Bacons and Board of Education focus on the above definition in isolation which can often be misleading. For example, in this case the City imposed its municipal service fee on the primary users of its flood and fire protection services. These primary users happen to be property owners. Thus, the City did not impose the municipal service fee on the owners of property by reason of their ownership alone. Instead, the fee is imposed upon property owners by reason of their use of fire and flood protection services. Therefore, the municipal service fee is not a property tax in this instance.

Lastly, the Bacons and the Board of Education argue that because the proceeds from the collection of the municipal service fee are not used exclusively to pay for fire and flood protection services, the municipal service fee is a tax. We agree that the proceeds from the collection of the municipal service fee must be used exclusively to pay for fire and flood protection services. As previously noted, in the past, the City earmarked proceeds from the collection of the municipal service fee to improve streets and municipal infrastructure. See Ordinance § 773.03(c) (1991) (“Of the amount collected under this fee, the amount of $250,000.00 shall be allocated to improve streets and municipal infrastructure each year for the fiscal years 1991-1992, 1992-1993 and 1993-1994.”) The “operation and effect” of using the proceeds to improve streets and municipal infrastructure makes the municipal service fee a tax. Currently, however, the municipal service fee is not being used in this manner. Therefore, as long as the proceeds generated from the collection of the municipal service fee are not earmarked for use other than to defray the cost of providing fire and flood protection services and as long as the proceeds do not exceed the costs of providing fire and flood protection services, we find that the “operation and effect” of the municipal service fee to be that of a fee.

Accordingly, we hold that an ordinance which imposes a municipal service fee pursuant to W. Va.Code, 8-13-13 [1971] upon *468 the owners of buildings at an annual rate plus a percentage based upon the square footage of space contained in each structure on the lot for the sole purpose of defraying the cost of fire and flood protection services is a user fee rather than a tax and therefore, is not in violation of the Tax Limitation Amendment found in W. Va. Const. Art. X, § 1.

C.

Municipal service fee reasonably serves its purpose

Having established the service charge in this case to be a fee, we must now determine whether the City has properly used the authority granted to it by the legislature in W.Va.Code, 8-13-13 [1971]. We have stated that

[t]he standard of review of an ordinance exercising such power as that granted by W. VcuCode, 8-13-13 [1971] is the reasonableness of the ordinance. See Harvey v. Elkins, 65 W.Va. 305, 64 S.E. 247 (1909). The determination of whether an ordinance reasonably serves the purpose for which it was enacted is initially made by the municipal authorities. Their passage of the ordinance gives it a presumptive validity and a court should not hold the ordinance to be invalid unless it is clear that the ordinance is unreasonable. Henderson v. Bluefield, 98 W.Va. 640, 127 S.E. 492 (1925).

Ellison v. City of Parkersburg,