Stanford Law School - Robert Crown Law Library

THIS OPINION IS A MODIFICATION OF THE CALIFORNIA SUPREME COURT'S JUDGMENT IN THIS CASE FROM JAN. 31, 2011. TO SEE THE ORIGINAL OPINION AND ITS CORRESPONDING ANNOTATION, CLICK HERE.

A group of California water rights holders challenged the constitutionality of a statutory and regulatory scheme that authorized the State Water Resources Control Board to collect annual fees from water rights’ holders. Plaintiffs Northern California Water Association and Central Valley Water Project Association argued that Water Code 1525 imposes an unconstitutional “new ad valorem tax[ ] on real property” since Proposition 13 prohibits this particular category of new taxes, regardless of legislative approval. (Cal. Const., art. XIII A, § 3.) In rebutting this argument in its January opinion, the Supreme Court stated that water rights are not real property rights. Yet more than 160 years of California case law supports the assertion that water rights are treated as real property. Consequently, Northern California Water Association advanced this argument and filed a Petition for Rehearing based on the Courts’ erroneous statement that water rights are not real property rights.

On April 20, 2011, the court explained that rather than grant a rehearing, it would modify its previous opinion to address plaintiffs’ concerns. Yet the Court’s modified opinion does not explicitly explain why it is modifying its opinion, nor does the Court admit to making any type of errors in reasoning in its prior opinion. I believe that in its original opinion, the Court was trying to say that the fees were imposed for the use of water, not mere ownership of water, and that therefore the Water Code and its implementing regulations do not tax ownership of real property. However, the Court does not attempt to flesh out such an argument in its modified opinion.

Rather, the Court’s modified April opinion advances a new argument to rebut plaintiffs' argument that Water Code 1525 imposes an unconstitutional “new ad valorem tax[ ] on real property.” The Court explains that it already determined that section 1525 does not impose a tax on its face, and if section 1525 is not a tax, it clearly cannot be an “ad valorem tax” on real property. The Court held “Any further consideration of the ad valorem real property tax issue is premature.” However, the Court then posed two scenarios which seem to make considering the ad-valorem-tax not just premature, but a moot point. It noted that on the one hand, if on remand the trial court concludes that the charges are valid fees, not taxes, then the charges do not constitute ad valorem taxes on real property. On the other hand, if on remand the trial court concludes that the charges are not valid fees but taxes, those taxes will be unconstitutional under Proposition 13, whether or not they are “ad valorem taxes on real property” (Cal. Const., art. XIII A, § 3), because they were authorized by less than a two-thirds legislative vote. Thus, it appears nothing in the case could turn on whether the monetary impositions are ad valorem taxes on real property, even if the Court does not explicitly say as much.

Indeed, the language of the California Constitution suggests that the ad-valorem issue is one that need not be considered until the court has established that a moentary imposition is indeed a tax. “[A]ny changes in state taxes enacted for the purpose of increasing revenues collected pursuant thereto . . . must be imposed by an Act passed by not less than two-thirds of all members elected to each of the two houses of the Legislature, except that no new ad valorem taxes on real property . . . may be imposed.”

By describing the ad valorem tax issue as “premature,“ the Court is implicitly suggesting that the ad valorem issue could arise later in the litigation. In other words, if the Legislature were to take another vote on Senate Bill 1049 and more than two-thirds of each house of the Legislature approved of the bill, plaintiffs might still challenge the constitutionality of the Water Code amendments on ad valorem grounds even if the tax vs. fee issue had become moot.

In conclusion, the Court’s modified opinion alters some of the legal reasoning in its prior opinion, but it does not modify its earlier judgment. The following information is reduplicated in the annotation to the Court's Jan. 31, 2011 opinion.

General Summary

A group of California water rights holders challenged the constitutionality of a statutory and regulatory scheme that authorized the State Water Resources Control Board to collect annual fees from them.

Facts

Under article XIII A, Section 3 of the California Constitution (the amendment instituted by the notorious Proposition 13 of 1978), an act to increase taxes requires two-thirds Legislative support. Conversely, statutes that create or raise regulatory fees require only a majority of Legislative support.

By a 53% majority, the California Legislature passed Senate Bill No. 1049 in 2003, enacting and amending Water Code sections 1525-1560. Amended Water Code section 1525 specifically stipulates that the State Water Resources Control Board (SWRCB) is responsible for creating and implementing an annual schedule of fees for its Water Rights Division so that this Division can recover its costs for issuance, supervision, and modification of permits and licenses. The fees are collected by the State's Board of Equalization (BOE). Previously, activities of the SWRCB's Water Rights Division had been funded by the State's General Fund, not by such user fees.

Under the amended Water Code, fees are to be paid by the permit and license holders regulated by the SWRCB. These permit and license holders represent those who acquired appropriative rights after 1913 to take water from watercourses that do not run adjacent to their properties. This group controls only about 40% of the water in California that is subject to water rights. Other water rights are held by groups whose water rights the SWRCB has no authority to regulate (those who acquired appropriative rights in 1913 or earlier, those who hold riparian/pueblo rights, and the federal government).

To implement section 1525’s fee requirement, the SWRCB adopted California Code of Regulations, title 23, sections 1066 and 1073 (regulation 1066 and regulation 1073). These regulations set formulas to calculate annual fees for permit and license holders, as well as for federal contractors. Regulation 1066, which applies to post-1914 permit and license holders, establishes the minimum annual fee as the greater of $100, or $.03 for each acre-foot based on the total annual amount of water diversion authorized by the permit or license.

Regulation 1073, which implemented the provisions of Water Code sections 1540 and 1560, addressed rights held by the Bureau of Reclamation, but contracted out to federal contractors. Regulation 1073, subdivision (b)(2) applied a formula to calculate the annual fee imposed on those contractors “[i]f the [Bureau of Reclamation] decline[d] or [was] likely to decline to pay the fee or expense . . . for the [Central Valley Project].” Regulation 1073 assessed annual fees against federal contractors based on a prorated portion of the total amount of annual fees associated with all Bureau permits and licenses, rather than the portion available under the terms of their contracts. Thus, even though contractors have contractual rights for only 5% of Bureau’s rights, they must pay for the entire amount of annual fees otherwise imposed on Bureau.

In January 2004, both section 1525 permit and license holders and federal contractors received notices for their new user fees. The users believed the fees were disproportionately large compared to their regulatory burden for several reasons. First, many California water rights predate 1914 requirements for permits and licensing, and therefore, the holders of those rights do not pay fees. Second, due to sovereign immunity, the federal government cannot be forced to pay fees to the State, yet it holds numerous water rights that account for much of California’s water diversion. These two aforementioned reasons mean that only 40% of water rights' holders are being charged a fee that plaintiffs argued should be charged to all water rights' holders. Third, in determining the minimum fee amounts, the SWRCB assumed it would be unable to collect 40% of billings from water rights' holders who claimed sovereign immunity or who refused to pay their bills. Fourth, the SWRCB charged federal contractors based on the face value of the federal government’s water rights (the total amount of annual costs associated with all Bureau of Reclamation permits and licenses) rather than based on the amount of water the federal contractors had contracted to deliver. Individuals and agencies that contracted with the federal government for water deliveries were assessed a fee that was more than 10 times higher than the fees charged for those engaged in the direct diversion of water. For these reasons, water permit/license holders and federal contractors felt the fees were not sufficiently linked to the regulatory costs they themselves generated and thus constituted a tax.

Several plaintiffs’ groups representing various water rights holders challenged the imposition of these fees as unconstitutional. They alleged that the statutory scheme adopted by the Legislature and the emergency regulations adopted to implement the scheme were unconstitutional both on their face and as applied. They sought declaratory and injunctive relief and a writ of mandate.

Procedural History

In 2005, the trial court denied the plaintiffs' writ of mandate, ruling that the money collected constituted valid regulatory fees, rather than taxes. It also rejected plaintiffs’ other constitutional claims in their entirety.

In January 2007, the 3rd District Court of Appeal reversed in part, holding that Water Code section 1525 was constitutional on its face, but unconstitutional as applied to the SWRCB’s implementing regulations. The Court of Appeal found the regulations were not proportional to their benefits, and hence were taxes rather than fees. It thus invalidated the regulations that establish the amount of annual fees that water right permit and license holders pay each year, as well as the regulations that establish water rights’ fees for federal contractors, holding that that the SWRCB limited as to how much of the fees it could pass on to contractors. In addition, the Court of Appeal remanded the case to the trial court with instructions that it “(1) stay further proceedings before the SWRCB and/or BOE until the SWRCB adopts new fee schedule formulas and a procedure for calculating refunds if any; (2) order the SWRCB to adopt valid fee schedule formulas within 180 days of the finality of this opinion; (3) order the SWRCB to determine the amount of annual fees improperly assessed under regulations 1066 and 1073 for the 2003-2004 fiscal year and establish a procedure for calculating refunds, if any, due within 180 days of the finality of this opinion; and (4) order the Board of Equalization, through the SWRCB, to refund any annual fees unlawfully collected to fee payers who filed timely petitions for reconsideration with the SWRCB.”

The SWRCB requested the Supreme Court to review the Court of Appeal’s opinion, and the
Supreme Court granted certiorari in April 2007.

Issues

1. Whether California Water Code section 1525(a) imposes an unlawful tax (requiring 2/3 supermajority approval by the Legislature) or a lawful regulatory fee (requiring only majority approval by the Legislature)—i.e. Is the statute unconstitutional on its face?

2. Whether the SWRCB regulation implementing California Water Code section 1525(a) (Regulation 1066) imposes an unlawful tax (requiring 2/3 supermajority approval by the Legislature) or a lawful regulatory fee (requiring only majority approval by the Legislature)— i.e. Is the statute unconstitutional as applied?

3. Whether Water Code sections 1540 and 1560 impose an unlawful ad valorem tax on real property.

4. Whether Water Code sections 1540 and 1560 violate the Supremacy Cause by collecting funds for water permits from both federal and state sources—i.e. Is the statute unconstitutional on its face?

5. Whether the SWRCB regulation implementing California Water Code sections 1540 and 1560 (Regulation 1073) violates the Supremacy Clause by collecting funds for water permits from both federal and state sources—i.e. Is the statute unconstitutional as applied?

6. If the Court of Appeal correctly ruled that the Water Code statutes were facially constitutional but their implementing regulations were unconstitutional, did the Court of Appeal err in limiting refunds to only those persons and entities filing petitions for reconsideration before the SWRCB?

Holding and Analysis

Issue 1. The Water Code amendments and their implementing regulations do not explicitly impose a tax and, therefore are not facially unconstitutional. The word tax has no fixed meaning, and distinctions between taxes and fees are frequently “blurred.” The Water Code’s language was specifically intended to avoid a tax. Section 1525 permits the imposition of fees not for general revenue purposes but only for specific enumerated functions and activities: the recovery of costs that the SWRCB incurs for its annual supervision of water usage and the processing of applications for new or modified water permits and licenses. Furthermore, in setting its fee schedules, SWRCB ensures that the “total amount of fees collected . . . equals that amount necessary to recover costs incurred in connection with” the Water Rights Division’s administration. The Court further noted that the statutes authorize the SWRCB to adjust the annual fees if the revenue collected during the prior year is greater than the amount set forth in the annual Budget Act.

Issue 2. The Water Code amendments and their implementing regulations may be unconstitutional as applied. Fees impose an unconstitutional tax if they are not reasonably apportioned. The record is unclear as to whether the fees were reasonably apportioned given the regulatory activity’s costs and the fees assessed (issue remanded to trial court for further findings). “In fact, at the hearing on plaintiffs’ motion for a peremptory writ of mandate, the trial court stated it did not believe it was required to make detailed [factual] findings.” The trial court’s findings should assess whether the fees reasonably relate to the total budgeted cost of the Water Rights Division’s activity, remembering that a government agency should be accorded some flexibility in calculating the amount and distribution of a regulatory fee.

Issue 3. Section 1525 does not impose an ad valorem tax on real property. Arguing that section 1525, subdivision (a), is unconstitutional because it improperly imposes an ad valorem tax on real property falsely assumes that water rights are real property rights, and that the fee imposed by section 1525 is based upon the ownership of real property. Water rights are usufructuary, and thus do not provide a right to hold title as real property rights do. * (holding and analysis amended by April 20, 2011 modified opinion. Modified opinion makes this issue “premature” for consideration or moot.)

Issue 4. Water Code sections 1540 and 1560 do not facially violate the Supremacy Clause. Federal courts do not distinguish between fees and taxes when analyzing the Supremacy Clause. Moreover, these fees are imposed on the water rights of private contractors, not on the water rights of the United States. These fees can be charged to those contractors who receive water deliveries from the federal government even though the fees cannot be directly collected from the federal government under principles of sovereign immunity. The fees are fair because they are limited to the extent that a contractor has possessory use of property or benefits from it.

Issue 5. Conflicting factual assertions and an unclear record concerning the extent and value of federal contractors’ beneficial interests make it impossible to decide if Water Code sections 1540 and 1560 are unconstitutional as applied (issue remanded to trial court for further findings). The trial court should make findings as to whether the Board has fairly evaluated the federal contractors’ beneficial interest, such that water not actually under contract for delivery is fairly attributable to the value of the delivery contracts themselves. On remand, the SWRCB will need to produce additional evidence to support its claim that 116 million acre feet of water is required to deliver 6.6 million acre feet of contract supply, and that this water is not otherwise diverted and then used for different purposes.

Issue 6: The Supreme Court declined to address this issue because the Court of Appeal erred in finding the Water Code’s implementing regulations were unconstitutional.

Justice Moreno’s Concurrence

Justice Moreno’s concurring opinion provides additional reflections on the “as applied” challenge to the fees. He underscored that a charge that is labeled a regulatory fee may indeed be a tax in disguise if “the amount of fees assessed and paid exceeded the reasonable cost of providing the [regulatory] services for which the fees were charged, or [if] the fees were levied for unrelated revenue purposes.” (Sinclair Paint Co. v. State Bd. of Equalization 15 Cal. 4th 866, 881 (1997). Justice Moreno questioned the credibility of SWRCB’s claims that 95% of its time and money are allocated toward fee payors because these claims were based primarily on a document produced shortly after litigation commenced. He also emphasized that SWRCB’s decisions regarding who may be subject to a fee may or may not be reasonable. For these reasons, he supported the majority’s decision to remand the case to the trial court for further evidence about whether the SWRCB’s implementing regulations were reasonable.

Tags

taxes vs. regulatory fees, federal contractors’ water rights, sovereign immunity, water rights permit and license holders, Proposition 13, California Water Code, water rights fees, ad valorem tax on real property, water rights as real property rights, money for water rights, funding water rights, paying for water rights, assessment of water rights, valuation of water rights, expenses for water rights, charges for water rights, constitutionality of taxes, constitutionality of fees, supermajority vs. majorityCalifornia Farm Bureau, Central Valley Water Project Association, Northern California Water Association, State Water Resources Control Board

Related Key Cases, Statutes, Regulations, and Legislation

Article XIII A, Section 3 of the California Constitution

Senate Bill No. 1049 (introducing the legislation that led to the Water Code amendments)

California Water Code Section 1525

California Water Code Section 1537

California Water Code Section 1540

California Water Code Section 1551

California Water Code Section 1552

California Water Code Section 1560

California Code of Regulations, Title 23, Section 1066

California Code of Regulations, Title 23, Section 1073

If session timeout, click here first and open any title before opening above regulations.

Sinclair Paint Co. v. State Bd. of Equalization, 15 Cal. 4th 866 (1997) (determining whether a statute imposes a tax or a fee is a question of law decided upon an independent review of the record; holding monetary impositions on paint manufacturers were regulatory fees, not taxes).

People v. Shirokow, 26 Cal. 3d 301 (1980) (relied on in arguing part of this opinion that was deleted in modified opinion).

California Assn. of Prof. Scientists v. Dept. of Fish & Game, 79 Cal. App. 4th 935 (2000) (holding proportionality not measured on collectively basis considering all rate payors; fees cannot surpass cost of regulatory services or programs they are designed to support).

Trial Court’s Documents: Sacramento County Superior Court (Select case number format “other” and search for case number: “03CS01776”).

Court of Appeal’s Case Summary and Docket

Citations to this Case

NO. 5 Miller & Starr, California Real Estate Newsalert 26, PROPERTY TAX DEVELOPMENTS (2011)

CA Jur. 3d Evidence s 89, Generally (2011)

CA Jur. 3d Property Taxes s 5, Fees distinguished (2011)

CA Jur. 3d Water s 294, Conditions of the license (2011)

CA Jur. 3d Water s 893, Cooperation (2011)

AN INTERPRETATION OF THE INTERNAL REVENUE CODE AND TREASURY REGULATIONS SUPPORTING THE TAX DEDUCTIBILITY OF THE VOLUNTARY CHARITABLE CONTRIBUTION IN PERPETUITY OF A PARTIAL INTEREST IN AN APPROPRIATIVE OR RIPARIAN WATER, 17 Hastings W.-N.W. J. Envtl. L. & Pol'y 93, 159 (2011)

COUNTY OF SISKIYOU, Petitioner, v. SUPERIOR COURT OF SACRAMENTO, Respondent, Environmental Law Foundation, Pacific Coast Federation of Fishermen's Associations, Institute for Fisheries Resources, and State Water Resources Control Board, Real Parties in Interest., 2011 WL 1464671, *1+ (Appellate Brief) (Cal.App. 3 Dist. Apr 01, 2011) Application for Leave to File Brief Amicus Curiae and Brief Amicus Curiae of Natural Resources Defense Council Supporting Respondent and Real Parties in Interest (NO. C067252) HN: 3 (Cal.Rptr.3d)

GREAT OAKS WATER COMPANY, Plaintiff and Respondent, v. SANTA CLARA VALLEY WATER DISTRICT, Defendant and Appellant. Great Oaks Water Company, Plaintiff and Appellant, v. Santa Clara Valley Water District, Defendant and Respondent., 2011 WL 700357, *700357+ (Appellate Brief) (Cal.App. 6 Dist. Feb 11, 2011) Santa Clara Valley Water District's Supplemental Brief on the Merits Appeal (H035260) Regarding California Farm Bureau Federation v. State Water Resources Board (NO. H035260, H035885)

Annotated by Joshua Cooley