City of Oklahoma City v. Oklahoma Tax Com'n

Citation1990 OK 27,789 P.2d 1287
Decision Date27 March 1990
Docket NumberNo. 68405,68405
PartiesThe CITY OF OKLAHOMA CITY, a Municipal Corporation, Appellant, v. The OKLAHOMA TAX COMMISSION, Cindy Rambo, Chairman, Appellees.
CourtSupreme Court of Oklahoma

Certiorari to the Court of Appeals Oklahoma City Division; Leamon Freemon, Trial Judge.

The trial court dismissed with prejudice the appellant/City of Oklahoma City's (City) petition for failure to state a claim. The City had sought a declaration that interest earned on municipal tax revenues collected by the appellee/Oklahoma Tax Commission was an accretion to principal, and an accounting of interest due. The Court of Appeals reversed finding that the appellant was entitled to interest earned on sales taxes as accretion to the principal. The issues presented are: 1) whether a municipality which contracts with the Oklahoma Tax Commission for the collection of municipal taxes under the authority of 68 O.S.Supp.1986 § 2702 is entitled to interest earned by taxes deposited in the State Treasury; and 2) if the municipality is entitled to investment interest, whether it may recover interest deposited to the state's general revenue fund. We find that: 1) the interest earned on municipal sales tax revenues is an accretion or increment to the principal tax. Pursuant to the Okla. Const. art. 10, § 19, the total i.e., principal and interest, must be expended for the purpose levied; and 2) because the fund representing interest earned on the investment of the municipal sales taxes has been appropriated, it is not recoverable.

CERTIORARI GRANTED; OPINION OF THE COURT OF APPEALS VACATED; REVERSED.

Robert D. Allen, Municipal Counselor, Diane Davis Huckins, Thomas S. Jones, Assistant Municipal Counselors, Oklahoma City, for appellant.

General Counselor, Oklahoma Tax Com'n, Oklahoma City, for appellees.

KAUGER, Justice.

The issues presented are: 1) whether a municipality which contracts with the Oklahoma Tax Commission for the collection of municipal taxes under the authority of 68 O.S.Supp.1986 § 2702 1 is entitled to interest earned by taxes deposited in the State Treasury; and 2) if the municipality is entitled to investment interest, whether it may

recover interest deposited to the state's general revenue fund. We find that: 1) the interest earned on municipal sales tax revenues is an accretion or increment to the principal tax. Pursuant to the Okla. Const. art. 10, § 19, the total i.e., principal and interest, must be expended for the purpose levied; and 2) because the fund representing interest earned on the investment of the municipal sales taxes has been appropriated, it is not recoverable. 2

FACTS

Under a contract executed pursuant to 68 O.S.Supp.1986 § 2702, the appellee/Oklahoma Tax Commission (Tax Commission) collects sales taxes for the appellee/City of Oklahoma City (City). The tax revenues are deposited with the State Treasurer in the Tax Commission's revolving fund 3 where they are comingled with other tax collections. The State Treasurer invests the monies under the guidelines of 62 O.S.1981 § 89.2. TITLE 62 O.S.1981 § 2034 5 requires that the interest earned from these investments be deposited in the general revenue fund. The State Treasurer holds the municipal taxes for approximately thirty days. On the tenth of each month, the Tax Commission remits municipal The City filed a declaratory judgment action on September 2, 1986, seeking to establish its right to interest earned on the investment of the sales taxes. The City also asked that the Tax Commission and State Treasurer be enjoined from appropriating and withholding the interest. On September 24, 1986, the Tax Commission filed a motion to dismiss, which was granted, without prejudice to refiling, on November 5, 1986. Thereafter, the City filed an amended petition asserting that the Okla. Const., art. 10, § 19, prohibited the Tax Commission from retaining interest earned from investment of the sales taxes. The City alleged that the Tax Commission breached the contract by retaining more than 1 1/2% of the municipal sales tax revenues as specified in the contract; that it permitted the commingling of municipal revenues with State revenues; that it violated the State Constitution by converting the interest or accretion to principal which belonged to the City to State purposes; that it failed to negotiate interest even though demand was made; and that it breached a fiduciary duty to the City by keeping improper records.

sales taxes collected for the previous month. 6 After deducting the contractual retention fee of 1 1/2% allowed by § 2702, the Tax Commission disburses the entire amount collected to the City. However, the Tax Commission does not pay the City interest on the taxes collected; and there is no evidence in the record concerning the amount of interest earned by the Treasurer's investment of the sales tax.

On January 15, 1987, the Tax Commission filed a motion to dismiss the amended petition with prejudice, and on February 5, 1987, the trial court sustained the Tax Commission's motion finding that the amended petition failed to state a claim for breach of contract. The Court of Appeals reversed the trial court, holding that because the interest was an accretion to the principal, the City was entitled to interest earned by investment of the tax revenues. The Court of Appeals also characterized the Tax Commission as a "vendor" and determined that the collected tax was deemed to be held in trust for the City. 7 We granted certiorari on November 8, 1989 to address a question which presents a significant question of public interest.

I THE INTEREST EARNED ON MUNICIPAL SALES TAX REVENUES IS AN ACCRETION OR INCREMENT TO THE PRINCIPAL TAX. PURSUANT TO THE OKLA. CONST. ART. 10, § 19

, THE TOTAL--PRINCIPAL AND INTEREST--MUST BE EXPENDED FOR

THE PURPOSE LEVIED.

The Tax Commission asserts that interest earned by investment of municipal sales taxes can be spent for purposes other than those for which the taxes were levied. The City, relying on the Okla. Const. art. 10, § 19, counters that because the interest earned by investment of the tax revenues is an accretion to the principal, the interest must be used for the same purpose as the tax. The disposition of the question--whether the interest earned on municipal sales tax revenues follows the principal--is controlled by the Okla. Const. art. 10, § 19 which provides:

Every act enacted by the Legislature, and every ordinance and resolution passed by any county, city, town, or municipal board or local legislative body, levying a tax shall specify distinctly the purpose for which said tax is levied, and no tax levied and collected for one purpose shall ever be devoted to another purpose.

On certiorari, the Tax Commission cites Application of State of Oklahoma Bldg. Bonds Comm'n, 202 Okla. 454, 214 P.2d 934, 937-38 (1950) to support its position that art. 10, § 19 is applicable only to the tax revenues, and not to the interest income earned thereon. We do not agree. Oklahoma Bldg. Bonds involved an original proceeding for approval and issuance of state bonds devoted to the upkeep of state buildings. A protest had been filed concerning the authority of the State Treasurer to invest state monies in the bonds. This Court found that the purchase of the bonds with public monies was for investment purposes; and that the investment was not a diversion of the funds, or a use for a purpose other than that for which the monies were collected. The issue presented here--whether interest earned on a tax levy is an accretion or increment of the investment which must be expended for the same purpose as the levied tax--was not involved.

The City has consistently maintained that art. 10, § 19 and Independent School Dist. No. 1 v. Board of County Comm'rs, 674 P.2d 547, 550 (Okla.1983), govern. In Independent School Dist., we held that under 70 O.S.1981 § 691 8 interest earned on the investment of school funds must be deposited to a school district account. The Tax Commission attempts to distinguish Independent School Dist. on the basis that a specific statute dictated that the interest follow the principal invested. We would be inclined to agree had the Court not also rested its decision on a broader and more fundamental basis, the Oklahoma Constitution. In Independent School Dist., we noted the rule of law that, absent a special statutory provision, interest is an accretion or increment to the principal fund earning it. 9 Recognition of the rule was premised on the mandate of art. 10, § 19 that taxes Here, the interest from municipal taxes earmarked for use by Oklahoma City is being diverted to the state's general revenue fund. The teaching of Independent School Dist. is that the interest becomes a part of the principal tax. Because art. 10, § 19 prohibits the diversion of such taxes, the interest earned on municipal sales tax revenues is properly attributable to the municipality levying the tax.

levied and collected for one purpose may not be devoted to another purpose. We recognized in Independent School Dist. that, even in absence of a special statutory provision, interest earned from taxes earmarked for a specific purpose must follow the principal.

The Tax Commission also argues that Independent School Dist. is not applicable because the interest is not an accretion to principal if legislation provides for the separation of the interest from the principal. The Tax Commission contends that 62 O.S.1981 § 203 10 requires that interest earned on average daily bank balances be deposited to the general revenue fund. However, if § 203 is interpreted to require that a tax levied for municipal purposes be diverted to state coffers, it contravenes art. 10, § 19. Such an interpretation would render the statute unconstitutional.

Whenever possible, statutes will be interpreted to avoid constitutional conflict. If a statute is susceptible of two constructions--one which will...

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