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State & Local Tax Bulletin (August 1997)

California Supreme Court Allows
Legislature to Circumvent Proposition 13
Regarding New Taxes

By Richard E. Nielsen, of counsel in the San Francisco office of Pillsbury Winthrop Shaw Pittman LLP. If you have or can obtain the Acrobat Reader, or have an Acrobat-enabled web browser, you may wish to download or view our August 1997 State & Local Tax Bulletin (a 136K pdf file), containing a printed version of this article and also available via ftp at ftp.pmstax.com/state/bull9708.pdf.

This information is only of a general nature, intended simply as background material, omits many details and special rules and cannot be regarded as legal or tax advice.

In a case monitored by many groups[fn. 1] throughout the State, the California Supreme Court reversed the judgment of the Third District Court of Appeal which had affirmed the trial court's grant of summary judgment in favor of Sinclair Paint Company ("Sinclair"). The unanimous opinion[fn. 2] authored by Associate Justice Chin rejected Sinclair's contention that certain fees paid by Sinclair under the Childhood Lead Poisoning Prevention Act of 1991 were in fact unconstitutional taxes imposed with less than the two-thirds vote of the Legislature required by Proposition 13.[fn. 3] The Supreme Court held that case law clearly indicates that the police power is broad enough to include mandatory remedial measures to mitigate the past, present, or future adverse impact of the fee payer's operations, at least where, as here, the measure requires a causal connection or nexus between the product and its adverse effects.


In 1991, the California Legislature enacted Assembly Bill No. 2038, the Childhood Lead Poisoning Prevention Act of 1991 (the "Act"). AB 2038 passed the Legislature with less than a two-thirds vote in both the Assembly and the Senate.[fn. 4] The Act created a new article in the California Health and Safety Code beginning at section 372. Health and Safety Code section 372.7(a) imposes a "fee" on "manufacturers and other persons . . . engaged in the stream of commerce of lead or products containing lead," whether presently or at any time in the past. The "fee" also applies to any persons who are "responsible for identifiable sources of lead" that have "significantly contributed . . . to environmental lead contamination," whether presently or at any time in the past.

Under Health and Safety Code section 372.7(b), the California Department of Health Services ("DHS") is required to establish specific "fees" by regulation. The statute provides that to the maximum extent practicable, the "fees" are to be assessed on a person's "past and present responsibility for environmental lead contamination," and a person's "market share" responsibility for environmental lead contamination. The revenues generated by the "fees" are applied to a program administered by the DHS relating to the detection and monitoring of lead poisoning in children. The two industries which were singled out for the bulk of the payment of the fees were the paint and petroleum industries.

Article XIIIA, Section 3 of the California Constitution requires that any changes in state taxes enacted for the purpose of increasing revenues must be passed by a two- thirds vote in both the Assembly and the Senate. This provision was added to the Constitution as part of Proposition 13, the 1978 voter initiative that also placed new restrictions on property tax rates, property tax assessments and local taxes. As the California Supreme Court recognized in Amador Valley Joint Union High School District v. State Board of Equalization, 22 Cal. 3d 208 (1978), in which the Court upheld Proposition 13 against a constitutional challenge, the individual elements of Proposition 13 together formed an interlocking "package" of measures deemed necessary by the voters to assure effective tax relief. Taken together, the elements of Proposition 13 create a system of firm fiscal restraints on the taxing powers of state and local governments. In Section 3 of Article XIIIA, the voters made it clear that the Legislature could not raise new revenues without the unequivocal mandate of a two-thirds majority.

Factual Background

Regulations were ultimately issued by DHS to implement the Act and in March 1993, Sinclair was assessed $97,825.26 for the calendar year 1992. In May 1993, Sinclair paid the assessment to the State Board of Equalization ("Board") which was charged under the Act with collection of the so-called fees. Sinclair later filed an administrative claim for refund with the Board asserting that the fees were unconstitutionally imposed taxes adopted in violation of the voting requirements of section 3. The Board denied Sinclair's refund claim, and the underlying refund suit was filed.

Sinclair filed its complaint for refund of the fees against the Board in Sacramento Superior Court. Thereafter, DHS and other interested parties sought and were granted leave to intervene. Sinclair noticed a motion for summary judgment based on a facial challenge to the provisions of the Act on the ground that the fees constituted invalid taxes because the Act did not receive a two-thirds vote of the Legislature.

Prior to hearing Sinclair's motion, the Board as well as the Intervenors attempted to conduct extensive discovery. Sinclair resisted the discovery on the basis that it was unnecessary for determination of its motion which it contended presented purely legal issues. The Board filed a motion to compel.

The trial court held a hearing on Sinclair's summary judgment motion and granted summary judgment in favor of Sinclair and against the Board, DHS and the Intervenors. The discovery dispute was never heard.

The Court of Appeal affirmed and held that the fee in question was a tax and not a regulatory fee because it was enacted solely for revenue purposes and its payment was not connected with any regulation of the taxpayer itself. Accordingly, the Court of Appeal held the fee was invalid and did not comply with the requirement of Proposition 13 that new state taxes be passed by a two-thirds vote of the State Legislature.

Sinclair's Legal Arguments

Sinclair contended that the charges imposed by the Act were taxes rather than permissible fees because they did not fund regulation of the fee payers or their products, nor did they fund delivery of a government benefit or service to the fee payers. Sinclair argued that the absence of regulation (at least the absence of any nexus between the present fee and specific regulation) or benefit or service provided to the fee payer made the issue of the alleged burden placed on society by Sinclair's products irrelevant. Further, Sinclair asserted that discovery by the State and Intervenors directed against Sinclair was unnecessary in the context of a facial challenge to the Act. The Amici in support of Sinclair contended that the compulsory nature of the charge indicated that it was a tax rather than a fee. Amici argued that remedying a burden created by a fee payer's past activity is not by its very nature regulatory. Amici also argued that the Act does not provide for any regulatory activity directed at the fee payers. Amici argued as well that permitting discovery against fee payers in response to a facial challenge would create a chilling effect on such challenges, and that the existence of any benefit should be established at the time of the enactment of the statute.

The State's and Intervenors' Arguments

The State contended that it need not prove the existence of any benefit to Sinclair from its payment of fees because the fees are used to reduce the burden placed on society by Sinclair's and other fee payers' purported contribution to lead poisoning in children. Simply put, the State contended that the mere imposition of the fee pursuant to the police power of the State constituted regulation. (See note 5, infra, for the Court's holding on this point.) The State also argued that extensive regulation of Sinclair and other fee payers with respect to lead already existed at both the state and federal level, and that within such a framework the imposition of the fee was valid. The State argued that it should have been allowed to conduct discovery against Sinclair in order to establish the benefit (purportedly reduced tort actions concerning lead poisoning) received by Sinclair from its payment of the fees. The State asserted as well that the trial court improperly considered or relied on the legislative history concerning the Act.

Supreme Court's Analysis

The Court phrased the issue as "[a]re the 'fees' section 105310 imposes in legal effect 'taxes enacted for the purpose of increasing revenues' under Article XIIIA, Section 3, and therefore subject to a two-thirds majority vote?" Slip op. at 6. The Court observed that although no cases could be found that interpret the language of Section 3, several California appellate decisions have considered whether various fees are really "special taxes" under Article XIIIA, Section 4. The Court stated that these "special tax" cases may be helpful, though not conclusive, in deciding the case before it. Slip op. at 6.

The Court noted that whether impositions are "taxes" or "fees" is a question of law for the appellate courts to decide on an independent review of the facts. The distinction between taxes and fees is frequently blurred, taking on different meanings in different contexts. In general, taxes are imposed for revenue purposes, rather than in return for a specific benefit conferred or privilege granted. Most taxes are compulsory but compulsory fees may be deemed legitimate fees rather than taxes. Slip op. at 7-8.

The Court observed that special tax cases have involved three general categories of fees or assessments: (1) special assessments, based on the value of benefits conferred on property; (2) development fees, exacted in return for permits or other government privileges; and (3) regulatory fees, imposed under the police power. All three of these may overlap in a particular case. The Court then went on to consider each separately. Slip op. at 8. Special assessments on property or similar business charges, in amounts reasonably reflecting the value of the benefits conferred by improvements, are not "special taxes" under Article XIIIA, Section 4. Neither are development fees enacted in return for building permits or other governmental privileges if the amount of the fees bears a reasonable relation to the development's probable costs to the community and benefits to the developer. The Court agreed with Sinclair and the Court of Appeal that the fees did not constitute either special assessments or development fees as the face of the statute makes clear that the funds collected are used to benefit children exposed to lead, not Sinclair or other fee payers. Slip op. at 8-9.

The Court agreed with the State that the challenged fees fall within the third category, namely, regulatory fees imposed under the police power, rather than the taxing power. The Court relied on Pennell v. City of San Jose, 42 Cal.3d 365 (1986) for the proposition that regulatory fees in amounts necessary to carry out the regulation's purpose are valid despite the absence of any perceived benefit accruing to the fee payers. Slip op. at 10-11. Sinclair argued and the Court of Appeal agreed that the Act was primarily aimed at raising revenue. The Supreme Court disagreed and concluded that the Act imposes bona fide regulatory fees. Slip op. at 12.

The Court stated that the Act required manufacturers and other persons whose products exposed children to lead contamination to bear a fair share of the cost of mitigating the adverse health effects their products created in the community. Viewed as a "mitigating effects" measure, it is comparable in character to similar police power measures imposing fees to defray the actual or anticipated adverse effects of various business operations. The Court observed that from the viewpoint of general police power authority, it saw no reason why statutes or ordinances which call upon polluters or producers of contaminating products to help in mitigation or clean-up efforts should be deemed less "regulatory" in nature than the initial permit or licensing programs that allow them to operate.[fn. 5] Slip op. at 12.

The Court stated that the case law cited or discussed clearly indicates that the State's police power is broad enough to include the mandatory remedial measures to mitigate the past, present or future adverse impact of the fee payers operations, at least where, as here, the measure requires a causal connection or nexus between a product and its adverse effects. Slip op. at 12.

The Court cited San Diego Gas & Electric Co. v. San Diego County Air Pollution Control Dist., 203 Cal. App. 3d 1132 (1988) where it was held that a reasonable way to achieve Proposition 13's goal of tax relief is to shift the costs of controlling stationary sources of pollution from the tax-paying public to the pollution-causing industries themselves. In the instant matter, the Court concluded that the shifting of costs of providing evaluation, screening and medically necessary follow-up services for potential child victims of lead poisoning from the public to those persons deemed responsible for that poisoning is likewise a reasonable police power decision. In the Court's view, the fact that the challenged fees were charged after, rather than before, the products' adverse effects were realized is immaterial to the question whether the measure imposes valid regulatory fees rather than taxes. Slip op. at 14.

In the Court of Appeal, it was concluded that the fees were enacted solely for revenue purposes and that their payment gave Sinclair and the other fee payers the right to carry on their business without any further conditions. The Supreme Court disagreed. The Supreme Court stated that all regulatory fees are necessarily aimed at raising revenue to defray the cost of the regulatory program in question, but that fact does not automatically render those fees taxes. The Court also found inconclusive the fact that the Act permits Sinclair and the other fee payers to carry on their operations without any further conditions specified in the Act itself, because as indicated above, fees can regulate business entities without directly licensing them by mitigating their operation's adverse effects. The Court observed that the Act is part of a broader regulatory scheme (other state and federal statutory provisions), which regulates Sinclair and other manufacturers in the stream of commerce for products containing lead. Thus, the Court concluded that Sinclair's payment of the challenged fees did not confer the right to carry on business without any further conditions or regulations. Slip op. 16.

The Court concluded that under existing law, the challenged fees can be reasonably characterized as regulatory fees rather than as taxes. The Court observed that Sinclair can still attempt to prove at trial that the amount of fees assessed and paid exceeded the reasonable cost of providing the protective services for which the fees were charged, or that the fees were levied for unrelated revenue purposes. Additionally, Sinclair has the opportunity to try to show that no clear nexus exists between its products and childhood lead poisoning, or that the amount of the fees bore no reasonable relationship to the social or economic burdens its operations generated. Slip op. at 17.


Over $45 million in fees have been collected under the Act. The potential impact of Sinclair is tremendous since it is completely dependent upon the Legislature's propensity to camouflage taxes as fees. Virtually every industry can be found to place some type of burden on society and now the Court has only limited the Legislature's ability to impose fees on those industries within the bounds of its inventiveness. It is difficult, if not impossible, to reconcile Sinclair with the state of the law existing prior thereto. With this decision, the Supreme Court has broken alarming new ground in the tax versus fee controversy. Proposition 218 was a response to local governments being overzealous with fees and only the future will reveal what response may be forthcoming if the State Legislature follows in their footsteps.


  1. Western States Petroleum Association ("WSPA"), Western Independent Refiners Association ("WIRA"), California Manufacturers Association ("CMA"), California Chamber of Commerce ("CCC") and California Taxpayers' Association ("Cal-Tax") (hereinafter collectively referred to as "Amici") are nonprofit corporations and associations whose members represent a broad cross section of enterprises engaged in business in California and who appeared along with other organizations as amici in support of Respondent, Sinclair Paint Company. They were represented by Richard E. Nielsen and Jeffrey M. Vesely of this firm. The California Medical Association, California Academy of Family Physicians and various cities and counties were among the amici who appeared in support of Appellants. [return to text]

  2. Associate Justice Janice Rogers Brown did not participate in the case as she was the author of the Court of Appeal decision below. [return to text]

  3. California Constitution Article XIIIA, Section 3. [return to text]

  4. The Act was enacted by the provisions of AB 2038, introduced by Assemblyman Lloyd G. Connelly on March 8, 1991. After numerous amendments in the Assembly and the Senate, the bill was forwarded to Governor Pete Wilson on September 25, 1991. The Governor signed the bill on October 10, 1991. AB 2038 was recorded by the Secretary of State as Chapter 799 of the Statutes of 1991. [return to text]

  5. The Court concluded that the imposition of "mitigating effects" fees in a substantial amount "regulates" future conduct by deterring further manufacture, distribution, or sale of dangerous products, and by stimulating research and development efforts to produce safer or alternative products. What this conclusion ignores is that Sinclair's as well as other fee payer's products are already subjected to federal and state regulations regarding lead content, which presumably should deter and stimulate the conduct alluded to above. Also, what constitutes a substantial amount? Is it payer related? Is it an absolute amount or measured in some other fashion? [return to text]

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