City of Fernley v. State

• Decision Date: 14 January 2016
• Docket Number: No. 66851.,66851.
• Parties: CITY OF FERNLEY, Nevada, A Nevada Municipal Corporation, Appellant, v. The STATE of Nevada, DEPARTMENT OF TAXATION; The Honorable Dan Schwartz, in his capacity as Treasurer of the State of Nevada; and the Legislature of The State of Nevada, Respondents.
• Court: Nevada Supreme Court

366 P.3d 699

CITY OF FERNLEY, Nevada, A Nevada Municipal Corporation, Appellant,

v.The STATE of Nevada, DEPARTMENT OF TAXATION; The Honorable Dan Schwartz, in his capacity as Treasurer of the State of Nevada; and the Legislature of The State of Nevada, Respondents.

No. 66851.

Supreme Court of Nevada.

Jan. 14, 2016.

Rehearing Denied Feb. 19, 2016.

Brownstein Hyatt Farber Schreck, LLP, and Joshua J. Hicks, Las Vegas; Brandi L. Jensen, City Attorney, Fernley; Holley, Driggs, Walch, Fine, Wray, Puzey, Thompson and Clark V. Vellis, Reno, for Appellant.

Adam Paul Laxalt, Attorney General, Gina C. Session, Chief Deputy Attorney General, and Andrea Nichols, Senior Deputy Attorney General, Reno; Brenda J. Erdoes, Legislative Counsel, Kevin C. Powers, Chief Litigation Counsel, and J. Daniel Yu, Principal Deputy Legislative Counsel, Carson City, for Respondents.

Before the Court En Banc.

OPINION

By the Court, PICKERING, J.:

The Nevada Constitution prohibits the Legislature from passing local or special laws "[f]or the assessment and collection of taxes for state, county, and township purposes," Nev. Const. art. 4, § 20, and further requires that "[i]n all cases enumerated in [Section 20 ], and in all other cases where a general law can be made applicable, all laws shall be general and of uniform operation throughout the State." Nev. Const. art. 4, § 21 ; Clean Water Coal. v. The M Resort, LLC, 127 Nev. 301, 310, 255 P.3d 247, 253–54 (2011). Here, we are asked to decide whether the Local Government Tax Distribution Account under NRS 360.660 is special or local legislation in violation of Sections 20 and 21 of the Nevada Constitution. We conclude that the district court properly found the Local Government Tax Distribution Account to be general legislation. Accordingly, we affirm the district court's order granting summary judgment.

I.

A.

Some background on the C–Tax system is needed to make sense of the legal issues presented by this appeal. In 1997, the Legislature enacted the Local Government Tax Distribution Account, referred to as the C–Tax. 1997 Nev. Stat., ch. 660, § 1, at 3278. The C–Tax is designed to fund local governments and their corresponding entities by "creat[ing] a system that would be a little bit more responsive to where growth is occurring within each one of the counties." Hearing on S.C.R. 40 Before the Senate Comm. on Government Affairs, 69th Leg. (Nev., March 31, 1997). The C–Tax replaced a series of different systems; "some of [the previous systems] dealt with population solely, some of them dealt with assessed valuations, some of them included counties, some of them excluded counties, and various combinations in between." Id. Under previous systems, new cities would emerge to take advantage of their share in revenues without necessarily providing any benefit to the public. The previous systems also created an atmosphere of competition instead of cooperation. For example, before the C–Tax, "if one entity was to dissolve and be absorbed by another ... the allowed revenues that they had from various taxes would otherwise go away" instead of allowing entities to receive the revenues from assuming new responsibilities. Id.

To eliminate these inefficiencies, the Legislature "consolidate[d] a series of six different distribution formulas into one that ... is also more responsive to growth ... and in the long run, proves to be a more simplified and effective way of distributing the six revenues." Id. It is from this consolidation that the C–Tax derives its name: the Consolidation Tax. The C–Tax comprises six different tax pools: liquor tax, cigarette tax, real property transfer tax, basic city-county relief tax, supplemental city-county relief tax, and the basic motor vehicle privilege tax.

All of the revenue from the six different tax pools is consolidated into the C–Tax Account, which is regulated by the Department of Taxation. The C–Tax Account is then distributed to local governments under a two-tier system. First, as per the statutory formula, the State disburses revenue to Nevada's 17 counties under the Tier 1 distribution.¹ Second, following a different statutory formula, the counties disburse revenue to qualifying Tier 2 entities in their county. Only three types of entities qualify for a Tier 2 distribution: (1) Enterprise Districts, such as water, sewer, television, and sanitation services; (2) Local Governments, including counties, cities, and towns; and (3) Special Districts, such as fire departments, hospitals, and public libraries. See NRS 360.620 ; NRS 360.650.

Under the Tier 2 distribution system, there are two components: base distributions and excess distributions. NRS 360.680 ; NRS 360.690. If a Tier 2 entity—such as a county, city, or town—received taxes prior to July 1, 1998, it will continue to receive that same base amount, which increases as per the Consumer Price Index. NRS 360.670. After all of the base amounts are paid, if there is a surplus in the account, it is distributed as an "excess" distribution to the Tier 2 entities (except Enterprise Districts). NRS 360.690. The excess distributions are calculated using a statutory formula that measures changes in population and assessed valuation of taxable property. NRS 360.690(4)-(9).

If a Tier 2 entity—such as a city or a town—did not exist before July 1, 1998, or did exist, but wants to increase its base amount, there are three ways to qualify for an increased C–Tax distribution. First, a new local government is eligible for increased C–Tax distributions if it provides police protection and at least two of the following services: (1) fire protection; (2) construction, maintenance, and repair of roads; or (3) parks and recreation. NRS 360.740. Second, a new local government can assume the functions of another local government (i.e., merger of entities). NRS 354.598747. Third, a new local government can enter into a cooperative "interlocal" agreement with another local government (i.e., taking over services provided by the other local government or agreeing to pay costs). NRS 360.730.

All three options involve the new local government providing services by either creating or assuming the responsibilities for the services. The Legislature feared that new entities could form and take money away from counties without having "any of the responsibility to share in any of the social parts of government." Hearing on S.C.R. 40 Before the Senate Comm. on Government Affairs, 69th Leg. (Nev., March 31, 1997). These options demonstrate that the object of the C–Tax was to foster general-purpose governments. Hearing on S.C.R. 40 Before the Senate Comm. on Government Affairs, 69th Leg. (Nev., April 14, 1997) ("[T]he distribution formula was a deliberate attempt to promote the formation of general-purpose governments, as opposed to special-purpose governments."). The Legislature found general-purpose governments desirable because "of all the little forms of government that we have ... they can make a conscious decision, on an annual basis, about service levels." Hearing on S.C.R. 40 Before the Senate Comm. on Government Affairs, 69th Leg. (Nev., March 31, 1997).

B.

When the Legislature enacted the C–Tax system in 1997, Fernley was an unincorporated town, thus qualifying for a Tier 2 distribution as a local government entity. To facilitate the transition between the previous tax system and the C–Tax system, the Legislature "would begin in the base year with the amounts of revenue that [the Tier 2 entities] otherwise would have realized under the former series of distribution formulas." Id. Thus, Fernley's initial year of C–Tax distributions—base and excess—were calculated based on its status as an unincorporated town.

In 1998, Fernley began taking the steps required by NRS Chapter 266 to bring about its incorporation. One of the required steps was to submit an incorporation petition, which must include the plans for providing police protection, fire protection, road maintenance, and other governmental services, plus a cost estimate and sources of revenue to pay for those services. Over the next two years, Fernley corresponded with the Department of Taxation to obtain estimates of the C–Tax distributions it would receive if it incorporated. However, the Department of Taxation informed Fernley on multiple occasions that it would not receive increased C–Tax distributions if it did not provide services under NRS 360.740, assume responsibilities of another government, or enter into an interlocal agreement. At the time, Lyon County provided Fernley's fire protection, police protection, and construction, maintenance, and repair of roads, while also funding Fernley's three public parks.

In its incorporation petition, Fernley planned to provide governmental services after it incorporated. However, this plan was contingent upon Lyon County approving an interlocal agreement in which Lyon County would continue providing those services while Fernley negotiated to fund those services. The Committee on Local Government Finance expressed concern about Fernley's plan because the plan depended "largely on how willing and how able the city is to reach an agreement with the County." But, the Committee went on to conclude that "if indeed, the working with the County goes smoothly I think we clearly have the ability to provide the revenues needed for a city [but if] the County says no, go take a walk, then you've got big problems."

Despite notice that its C–Tax distributions may not increase unless it creates, assumes, or enters into an interlocal agreement to provide services, Fernley incorporated on July 1, 2001. Fernley is the only government entity to incorporate after the enactment of the C–Tax. After its incorporation, Fernley neither entered into an interlocal agreement with Lyon County, nor did Fernley create or assume public services. Instead, Lyon County continued to provide Fernley with all of its services.

Although Fernley incorporated as a city, its C–Tax base distribution was...