A Fee or a Tax? Beware of Localities Going Too Far

The BR State + Local Tax Spotlight

On May 20, 2022, the Texas Supreme Court held that a locality lacked authority under Texas law to impose a licensing fee on a construction trash-hauling company that was calculated as a percentage of the company’s revenue. Builder Recovery Servs., LLC v. The Town of Westlake, Texas, No. 21-0173 (Tex. May 20, 2022). The Court rejected the locality’s argument that its authority under Texas law to regulate “solid waste collection, handling, transportation, storage, processing, and disposal” necessarily permitted the imposition of a percentage of revenue fee, instead finding that the fee “resembles—at least in its mode of calculation—a traditional business tax” and “[f]rom the perspective of the fee-payer, . . . an unconstitutional occupation tax.” Id. at 8-9. This case is a reminder that the authority of localities to impose taxes or fees is usually strictly limited by state law and companies being audited or assessed by localities should always consider whether the locality’s tax or fee scheme complies with state law.

Facts: The Town of Westlake’s local ordinance required construction trash haulers like the company to obtain a license to operate in the Town. Licensees were required, among other things, to identify their vehicles and containers, maintain their vehicles and containers in good repair, maintain insurance and other paperwork, and submit certain reports to the town. Licensees were also required to pay a monthly license fee equal to 15 percent of their revenue generated in the Town.

The company brought a lawsuit in district court challenging the legality of the license fee. The Town informed the district court that the ordinance had been amended after the company brought its lawsuit decreasing the amount of the license fee from 15 percent to three percent of revenue. The district court issued a declaratory judgment that the 15 percent license fee was invalid and unlawful and awarded the company attorney’s fees. The court of appeals held that the company’s challenge was moot because the Town had replaced the 15 percent fee with the three percent fee. The appeal to the Texas Supreme Court ensued.

The Decision: The Texas Supreme Court first held that the company’s lawsuit was not mooted by the amendment to the ordinance because the company’s claim was that a percentage of revenue fee is unlawful regardless of the percentage. The Court found that a lawful fee “would have to be tethered to the Town’s costs of administering the regulation” of construction trash haulers, but the percentage of revenue fee “is tethered only to the market price of trash-hauling services, not to the Town’s cost of regulating.” Id. at 9. The Court concluded that it was “unlikely” that the Legislature’s grant to the Town of “the generic authority to regulate trash hauling” includes an implied grant of power to impose a percentage of revenue fee. Id. at 11. Finally, the Court remanded the case to the court of appeals for consideration of whether the unlawful percentage of revenue fee was severable from the rest of the ordinance or whether the Town’s entire regulatory scheme must be struck down.

This article is one in a series of articles written for the June 2022 edition of The BR State + Local Tax Spotlight.

© 2022 Blank Rome LLP. All rights reserved. Please contact Blank Rome for permission to reprint. Notice: The purpose of this update is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and completeness of which cannot be assured. This update should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.