Water rights 'fee' case goes before Supreme Court

The state Supreme Court is preparing to hear oral arguments over whether a “fee” imposed on water-right holders actually is an illegal tax, at the same time the state Board of Equalization is once again preparing to mail annual bills for the charges.

According to a board representative, notices for fiscal year 2010-11 are expected to be mailed in early December. The notices will be sent to some 6,500 water-right licensees and permitees, who hold more than 13,000 permits and licenses issued by the Division of Water Rights, a unit of the State Water Resources Control Board.

Starting when the charge was introduced in 2003, California Farm Bureau Federation attorneys recommended that bill recipients file a protest—technically, a petition for reconsideration—with the State Water Resources Control Board for every year’s billings. Doing so, they said, could improve their chances of obtaining a refund if the fee were ultimately ruled invalid.

Farm Bureau, along with other organizations, sued the state “in an effort to block these taxes disguised as fees,” said CFBF Associate Counsel Carl Borden.

In the past, Borden advised water rights holders to pay the charge and file a protest.

“This year, water rights holders should consider filing only the protest portion with the State Water Resources Control Board and not paying their bills before the board has acted on their protest,” Borden said. “A ruling by the state Supreme Court that the so-called fee is unconstitutional should compel the board, for the first time, to grant the protests and relieve water rights holders from having to pay.”

Even if the SWRCB were once again to deny the protests—regardless of the court’s opinion—Borden said fee payers would have 30 days after the denial to pay without penalty, although some interest also would be due.

Although the Supreme Court has been slow to take up the case—Borden noted that attorneys finished filing their briefs in the case with the court more than three years ago—a decision could come quickly. The court must issue its opinion within 90 days after the Dec. 7 hearing.

“I speculate that the court will issue its opinion by year end,” Borden said. “That’s because I think outgoing Chief Justice Ronald George will sit on the panel hearing oral argument. If so, the court will have to decide the case before he steps down from office on Jan. 2.”

Meanwhile, representatives for state agencies say that if the lawsuit does succeed, fee payers will be entitled to refunds only if they submitted to the water board a protest objecting to the fee and then filed a civil action in superior court after the board denied their protest.

Despite the state’s position, the lawsuit seeks refunds of all fees paid by all water-right permittees and licensees, which to date total tens of millions of dollars, including millions paid by farmers and ranchers.

In its lawsuit, Farm Bureau said the fees violate Proposition 13, which since 1978 has required legislation that results in new or increased taxes to be approved by a two-thirds vote of the Legislature. Farm Bureau contends the water-right fee amounts to an unconstitutional tax, because there is little connection between the amount charged and the benefits received by those who foot the bill.

In addition, Farm Bureau asserts the fee is an unconstitutional ad valorem tax assessed on real property—water rights—and thus also violates the Proposition 13 ban on new taxes of that type.

Although the 3rd District Court of Appeal held in 2007 that the underlying statutes authorizing the “regulatory fees” did not violate Proposition 13, the court invalidated the SWRCB regulations implementing those statutes.

Sacramento attorney Daniel Kelly of the law firm Somach, Simmons & Dunn, whose senior partner Stuart Somach will advocate the water rights holders’ position at the oral argument, said the regulations resulted in an unlawful tax.

The appellate court held that the statutes in question created valid “regulatory fees.” Regulatory fees are a relatively new type of government charge, employed by the California Legislature after passage of Proposition 13. Kelly said the courts have held that regulatory fees fall outside of the Proposition 13 requirement for a two-thirds majority vote.

“This loophole has gained in popularity as the Legislature continues to search for funding sources for many statewide programs,” Kelly said in a prepared statement.

Courts have continued to validate the imposition of these fees, he said, and a good portion of the funding of state agencies has shifted from General Fund revenue to regulatory fees, which require only a majority vote to adopt.

“These fees, of course, bear all the marks of taxes,” Kelly said. “They just go by a different name. With the proliferation of these fees, the California Supreme Court will now revisit the legitimacy of this new source of revenue and determine whether it squares with the voters’ intent in passing Proposition 13.”

As recently as the last election, voters again affirmed their intention of requiring a two-thirds approval for new taxes by approving Proposition 26. Proponents said the measure will put an end to hidden taxes being imposed as fees.

Borden said a form that can be used to file a protest with the SWRCB will soon be posted online at www.cfbf.com.

“It will be posted within a few days after the Board of Equalization has mailed the notices of determination,” Borden said. “Bill recipients should look for it after that.”

(Kate Campbell is an assistant editor of Ag Alert. She may be contacted at kcampbell@cfbf.com.)