Zolly v. City of Oakland

• Citation: 13 Cal.5th 780,514 P.3d 799,297 Cal.Rptr.3d 1
• Decision Date: 11 August 2022
• Docket Number: S262634
• Parties: Robert ZOLLY et al., Plaintiffs and Appellants, v. CITY OF OAKLAND, Defendant and Respondent.
• Court: United States State Supreme Court (California)

13 Cal.5th 780
514 P.3d 799
297 Cal.Rptr.3d 1

Robert ZOLLY et al., Plaintiffs and Appellants,
v.
CITY OF OAKLAND, Defendant and Respondent.

S262634

Supreme Court of California.

August 11, 2022

Zacks, Freedman & Patterson, Andrew M. Zacks, San Francisco; Katz Appellate Law and Paul J. Katz, San Francisco, for Plaintiffs and Appellants.

Horvitz & Levy, Jason R. Litt, Jeremy B. Rosen, Burbank, and Joshua C. McDaniel for McLane, Bednarski & Litt LLP and Rapkin & Associates, LLP, as Amici Curiae on behalf of Plaintiffs and Appellants.

Jonathan M. Coupal, Timothy A. Bittle, Sacramento, and Laura E. Dougherty for Howard Jarvis Taxpayers Association as Amicus Curiae on behalf of Plaintiffs and Appellants.

Peluso Law Group and Larry A. Peluso, Topanga, for Reuben Zadeh, Mable Chu and Herb Nadel as Amici Curiae on behalf of Plaintiffs and Appellants.

Barbara Parker, Oakland, City Attorney, Doryanna Moreno, Maria Bee, David Pereda, Celso Ortiz and Zoe Savitsky, Assistant City Attorneys; Chao ADR, Cedric C. Chao ; DLA Piper, Tamara Shepard, Mauricio Gonzalez, Stanley J. Panikowski and Jeanette Barzelay, San Francisco, for Defendant and Respondent.

Best Best & Krieger, Joshua Nelson, Sacramento, Lutfi Kharuf, San Diego, and Joanna Gin, Sacramento, for League of California Cities and the California State Association of Counties as Amici Curiae on behalf of Defendant and Respondent.

Olson Remcho, Robin B. Johansen, Sacramento, Thomas A. Willis and Margaret R. Prinzing, Oakland, for Legislature of

297 Cal.Rptr.3d 4

the State of California as Amicus Curiae on behalf of Defendant and Respondent.

Orrick, Herrington & Sutcliffe, Brian P. Goldman, Devin Brennan, San Francisco, Monica Haymond, Ethan P. Fallon ; Kathleen A. Kane, Duarte, and Adrienne D. Weil for Bay Area Toll Authority and Metropolitan Transportation Commission as Amici Curiae on behalf of Defendant and Respondent.

Kabateck, Brian S. Kabateck and Mike Arias, Los Angeles, for Consumer Attorneys of California as Amicus Curiae.

Opinion of the Court by Liu, J.

Through a series of ballot initiatives, California voters have imposed several constitutional limitations on the ability of local governments to tax. Because these limitations may apply to charges that a local government does not formally designate as taxes, whether particular charges fall within the scope of the Constitution's taxation limitations is a recurring issue that both voters and the courts have addressed.

In 2012, the City of Oakland approved two contracts granting private waste haulers the right to "transact business, provide services, use the public street and/or other public places, and to operate a public utility" for waste collection services. As "consideration for the special franchise right," the waste haulers agreed to pay certain fees to Oakland. We granted review to decide how such fees should be treated under article XIII C of the California Constitution, which sets forth voter approval requirements that apply to taxes imposed by local government. (All references to articles are to the California Constitution.) Oakland claims that article XIII C, as amended in 2010 by Proposition 26, categorically exempts its challenged fees from such voter approval requirements, while

514 P.3d 802

plaintiffs Robert Zolly, Ray McFadden, and Stephen Clayton argue that the fees are exempt only if the amount of the fee bears a reasonable relationship to the value of the franchise.

We hold that Oakland has not shown on demurrer that its challenged fees are exempt from article XIII C's voter approval requirements. Accordingly, we affirm the Court of Appeal's judgment.

I.

Proposition 26 provides the general definition of a "tax" and a list of enumerated exemptions that are at the center of this dispute. To understand this measure, it is helpful to place it in the context of other voter initiatives that have limited the ability of local governments to tax, beginning in 1978 with the passage of Proposition 13.

Proposition 13 required the imposition of any "special taxes" to be approved by two-thirds of the qualified electors of the city, council, or special district. (Art. XIII A, § 4.) Proposition 13 did not define "special taxes." In City and County of San Francisco v. Farrell (1982) 32 Cal.3d 47, 184 Cal.Rptr. 713, 648 P.2d 935, "we construe[d] the term ‘special taxes’ ... to mean taxes which are levied for a specific purpose ...." ( Id. at p. 57, 184 Cal.Rptr. 713, 648 P.2d 935.)

In 1996, California voters passed Proposition 218, which amended the Constitution's voter approval requirements for local revenue-raising measures by adding articles XIII C and XIII D. ( Citizens for Fair REU Rates v. City of Redding (2018) 6 Cal.5th 1, 10, 237 Cal.Rptr.3d 179, 424 P.3d 268.) Article XIII D, which is not relevant here, "limits the authority of local governments to assess taxes and other charges on real property." ( Citizens for Fair REU Rates , at p. 11, 237 Cal.Rptr.3d 179, 424 P.3d 268.) Article XIII C "buttresses article XIII D by limiting the other methods

297 Cal.Rptr.3d 5

by which local governments can exact revenue using fees and taxes not based on real property value or ownership." ( Citizens for Fair REU Rates , at p. 10, 237 Cal.Rptr.3d 179, 424 P.3d 268.) Specifically, article XIII C provides that "[a]ll taxes imposed by any local government shall be deemed to be either general taxes or special taxes." (Art. XIII C, § 2, subd. (a).) General taxes must be approved by a majority vote at a general election, while special taxes must be approved by a two-thirds vote. (Art. XIII C, § 2, subds. (b), (d).)

Proposition 218 did not define what constitutes a "tax." The electorate addressed that issue in 2010 with the enactment of Proposition 26. ( Jacks v. City of Santa Barbara (2017) 3 Cal.5th 248, 260, 219 Cal.Rptr.3d 859, 397 P.3d 210 ( Jacks ).) This measure amended article XIII C to provide that a " ‘tax’ means any levy, charge, or exaction of any kind imposed by a local government." (Art. XIII C, § 1, subd. (e).) This general definition is qualified by seven exemptions:

"(1) A charge imposed for a specific benefit conferred or privilege granted directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of conferring the benefit or granting the privilege.

"(2) A charge imposed for a specific government service or product provided directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of providing the service or product.

"(3) A charge imposed for the reasonable regulatory costs to a local government for issuing licenses and permits, performing investigations, inspections, and audits, enforcing agricultural marketing orders, and the administrative enforcement and adjudication thereof.

"(4) A charge imposed for entrance to or use of local government property, or the purchase, rental, or lease of local government property.

"(5) A fine, penalty, or other monetary charge imposed by the judicial branch of government or a local government, as a result of a violation of law.

"(6) A charge imposed as a condition of property development.

"(7) Assessments and property-related fees imposed in accordance with the provisions of Article XIII D." (Art. XIII C, § 1, subd

514 P.3d 803

(e)(1)–(7).) Here the parties dispute the scope of the fourth exemption.

Following this list of exemptions, Proposition 26 provides that "[t]he local government bears the burden of proving by a preponderance of the evidence that a levy, charge, or other exaction is not a tax, that the amount is no more than necessary to cover the reasonable costs of the governmental activity, and that the manner in which those costs are allocated to a payor bear a fair or reasonable relationship to the payor's burdens on, or benefits received from, the governmental activity." (Art. XIII C, § 1, subd. (e).)

Proposition 26 also amended article XIII A to include a similar, though not identical, definition and list of exemptions regarding what constitutes a tax imposed by the state government. (Art. XIII A, § 3.)

II.

In this case, the trial court sustained Oakland's demurrer to plaintiffs' second amended complaint alleging that certain franchise fees were imposed in violation of article XIII C. In considering whether a demurrer should have been sustained, "we accept as true the well-pleaded facts in the operative complaint ...." (

297 Cal.Rptr.3d 6

Aryeh v. Canon Business Solutions, Inc. (2013) 55 Cal.4th 1185, 1189, fn. 1, 151 Cal.Rptr.3d 827, 292 P.3d 871.)

Plaintiffs allege that in 2012, Oakland initiated a procurement process for franchise contracts regarding garbage, mixed materials and organics, and residential recycling services. Following a settlement between the two firms that submitted proposals, Oakland awarded the garbage and mixed materials contracts to one firm and the residential recycling contract to the other firm.

Oakland's ordinance approving the mixed materials and organics contract provided for an initial annual franchise fee of $25,034,000, with subsequent franchise fees " ‘ "adjusted annually by the percentage change in the annual average of the Franchise Fee cost indicator." ’ " ( Zolly v. City of Oakland (2020) 47 Cal.App.5th 73, 79, 260 Cal.Rptr.3d 541 ( Zolly ).) Thereafter, Oakland passed an ordinance reducing this franchise fee by $3.24 million. The ordinance approving the residential recycling contract provided for an initial annual franchise fee of $3,000,000, with a similar mechanism for annual adjustments.

Based on " ‘citizen complaints,’ " an Alameda County grand jury " ‘undertook a comprehensive investigation related to the solicitation and award’ " of these contracts. ( Zolly , supra , 47 Cal.App.5th at p. 79, 260 Cal.Rptr.3d 541.) The grand jury found that Oakland's fees were disproportionately higher than franchise fees paid to other Bay Area municipalities and special districts. It also found Oakland's procurement...