Deadline nears for protesting water-rights fees

A third wave of billing notices hit the mailboxes of holders of water-rights permits and licenses in mid-November. That prompted a Farm Bureau attorney once again to recommend that bill recipients file protests to improve their chances of getting a refund of "water rights fees" if CFBF's suit challenging the assessments proves successful.

"Last year we sought an agreement with the state that would have guaranteed automatic refunds to bill payers if the so-called fees are ultimately held to be invalidly imposed taxes," said CFBF associate counsel Carl Borden. "Unfortunately, state attorneys insist that bill payers must file a protest—technically a Petition for Reconsideration—of the bills they pay for any given fiscal year to be eligible for a refund of the amount paid for that year."

To help plug a hole in the state budget, lawmakers in 2003 stripped all general-revenue funding from the State Water Resources Control Board's Division of Water Rights. Under Senate Bill 1049, the water board each year must adopt a schedule of fees calculated to fully fund the division. A big portion of the division's funding now comes from annual fees imposed on some 13,000 holders of water rights permits and licenses.

Believing those "Water Rights Fees" are in fact unconstitutional taxes imposed in violation of Proposition 13, CFBF in April 2004 filed a lawsuit challenging the statute that requires the water board to adopt a fee schedule for each fiscal year. The suit also specifically attacks the regulation that set the first fee schedule, which was for fiscal year 2003-04.

The Board of Equalization mailed bills—technically each is called a Notice of Determination—for FY 2003-04 "fees" in January 2004. It then mailed bills for FY 2004-05 "fees" in October 2004. Most recently, it mailed bills for FY 2005-06 "fees" on Nov. 7.

"Unless a bill recipient files a protest with the water board by Dec. 7," Borden noted, "the bill must be paid by that date to avoid the assessment of both interest and a penalty equal to10 percent of the fee."

"We had hoped to reach an agreement with the state that would have relieved us from having to file an identical legal challenge to each year's regulation. We also were hoping that the state would agree that Farm Bureau members could pay each year's bills with assurance of refunds if our suit succeeds without each of them having to file a protest," Borden said. "To our disappointment, that didn't happen."

Borden outlined four possible courses of action for bill recipients:

• Simply pay the fee to the BOE by Dec. 7, without filing a protest. By timely paying the fee, you would avoid the imposition of interest and the non-payment penalty. However, a court may, as argued by the State, determine that fee payers who did not file a protest are not entitled to a refund despite a subsequent court decision that the fee is invalid. "In other words, you might not get a refund if we win our case," Borden said.
• Don't pay the fee and take no other action. If you do this, interest at the rate of 8 percent per year and a 10 percent penalty would be added to the fee. "Before our lawsuit is resolved, the BOE could seek to collect the unpaid amount by, for example, attaching your wages and placing a lien on your real property. And if a court ultimately were to uphold the fees, you would still owe the amount you were billed plus interest and the penalty. Also, the SWRCB may revoke the permit or license of a holder who failed to pay the annual fee for five years," Borden said.
• Don't pay the fee for now but mail a Petition for Reconsideration with a copy of your bill or bills to the State Water Resources Control Board—not to the Board of Equalization. Your written protest and bill copies must reach the SWRCB by the 30th day after the date of your Notice of Determination—that is, by Dec. 7 for bills dated Nov. 7. The protest procedure is described in the bill under "Information concerning Determinations." A sample protest form that Farm Bureau members can use is posted on the Farm Bureau's Web site at www.cfbf.com/protestform.cfm.)

"That protest form requires only that you fill in your name and address and date, sign and mail it along with a copy of your bill or bills to the water board. If you do that, you need not pay the fee until the water board has denied your protest and 30 days after the BOE has issued a Notice of Redetermination that the fee is due. While interest will be due in addition to the fee, a non-payment penalty will not be due if the ‏fee' plus interest is paid within 30 days after the issuance of the Notice of Redetermination.

"This could take up to several months to occur. But the important thing is that filing a protest may enhance your ability to get a refund of fees paid if they are ultimately declared invalid. If you already paid your bill or bills or if, for whatever reason, you want to pay now, you should still consider filing a protest with the water board to enhance your odds of getting a refund," he said. "If you decide to exercise this option, keep a copy of everything you mail to the SWRCB. Again, this option requires immediate action, as the SWRCB must receive your protest by Dec. 7."

Mail your protest and bill copies to: State Water Resources Control Board, P.O. Box 2000, Sacramento CA 95812-2000.

• Pay the fee to the BOE now and mail a protest with a copy of your bill(s) to the SWRCB as described in the prior option. If you have already paid the bill(s) or if, for whatever reason such as the avoidance of interest charges, you decide to pay the bill(s) now, you can still file a protest with the SWRCB. Again, doing so may enhance your chances of getting a refund if the fees are later held invalid.

Borden said that letters containing this information were mailed on Nov. 23 to Farm Bureau members with water-rights permits or licenses. Those letters included an update on CFBF's lawsuit.

"In April, Judge Raymond Cadei of the Sacramento County Superior Court ruled against us," Borden reported. "In doing so, however, he sympathized with our arguments on the ‏tax vs. fee' issue. He seemed reluctant to rule as he did, indicating that had it been up to him, he might have written the appellate decisions that give such an expansive interpretation to the term ‏fee' differently, so as to allow a trial judge such as himself to rule otherwise," Borden said.

"Nonetheless, Judge Cadei said in the final analysis that the weight of those appellate decisions, which generally uphold exactions as valid fees, caused him to conclude that the water rights ‏fees' are valid regulatory fees, with a sufficient relationship to the overall program activities of the Division of Water Rights. He also opined that the appellate decisions let a state agency charge a subclass of the regulated community—as in this case, holders of post-1914 appropriative water rights—for the program costs, in effect subsidizing others not so charged.

"We've appealed Judge Cadei's ruling to California's Third District Court of Appeal," Borden said. "Although the judge felt he couldn't buck the trend of appellate decisions—none of which dealt with the funding by a subclass of the regulated community of virtually all the budget of a state agency with multiple program activities—we believe we can persuade the Third District Court of Appeal that the facts involved here warrant a different result.

"One encouraging remark by Judge Cadei was that perhaps an appeal of his ruling would result in a re-thinking by the Third District Court of Appeal of its ruling in the leading case on which he heavily relied," he said. "We expect that several friend-of-the-court briefs will be filed in support of our position, and we hope to receive a favorable opinion by the Third District Court of Appeal in 2006.

"While Judge Cadei's ruling disappointed us, we knew the dispute would in no event be resolved in Superior Court, given the importance of the issue involved," Borden said.