May 11, 2016

PLF files brief in Colorado Taxpayer’s Bill of Rights case

By PLF files brief in Colorado Taxpayer’s Bill of Rights case

The Colorado Taxpayer’s Bill of Rights (TABOR), added to the State constitution by the voters in 1992, requires that voters approve all state and local tax increases. To avoid TABOR’s requirement of voter approval, state and local governments oftentimes characterize a charge as a fee, because TABOR does not require fees to be approved by the voters. Yesterday, PLF filed a brief in National Federation of Independent Business v. Williams, asking the Colorado Court of Appeals to hold that a fee that is unrelated to defraying the cost of providing a service is a tax, even if it is labeled as a fee, and that it needs voter approval before it is enacted.

The Colorado Department of State requires companies to pay a business and licensing charge for filing various statutorily mandated corporate documents. The Department considers this charge to be a fee. But most of the money raised from the charge is not used to defray the cost of providing the business and licensing services, the classic purpose of a fee. The lion’s share of the business and licensing charges go to the Department’s Cash Fund, and less than 15% of the Fund is used to defray the cost of operating the Business and Licensing Division. Because most of the money raised from the business and licensing charge is used to provide the Department of State’s general services, it has all of the hallmarks of a tax, and should be labeled as such.

Colorado courts examine three factors to determine whether a charge is a tax or fee: (1) the language of the enabling statute; (2) the primary purpose for which the money is raised; and (3) whether the primary purpose of the charge is to defray the cost of services for those who must pay it. The District Court of Denver concluded that while the first two factors support characterizing the business and licensing charge as a fee, the third factor did not because the primary purpose was not to defray the cost of providing business and licensing services. Unfortunately, the court did not explain how it would consider the factors in this balancing test, instead concluding that TABOR did not even apply to the business and licensing charge.

PLF’s brief raises two points. First, we argue that Colorado courts should apply a presumption that TABOR applies to all charges. Colorado voters made it clear that they wanted to limit government growth when they enacted TABOR. Colorado Courts would give effect to the Colorado voters intent by applying a presumption that TABOR applies. Second, we suggest that Colorado courts follow the footsteps of other state courts in conducting the balancing test that determines whether a charge is a tax or fee, by giving stronger consideration to the third factor—whether the charge is meant to defray the cost of providing a service to those who must pay it—and de-emphasizing the first factor which considers the label given to the charge. Indeed, if Colorado courts give too much weight to the government’s characterization, governments will have a perverse incentive to mislabel charges to avoid TABOR’s requirements. Under this test, the business and licensing charge is clearly a tax. Thus, the charge would illegal because it was not submitted to the voters.

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National Federation of Independent Business v. Williams

Colorado voters added the Taxpayer’s Bill of Rights to their state constitution to ensure voter approval of all state and local tax increases. Government frequently attempts to dodge this provision by characterizing charges as “fees,” which do not require voter approval. The difference between a tax and a fee is that a fee defrays the cost of providing a service and a tax does not. Less than 15% of Colorado’s business and licensing charges are dedicated to drefraying the cost of operating the Business and Licensing Division of the Department of State; the vast majority subsidizes general services. The National Federation of Independent Business sued to invalidate the charge as a tax that was enacted without voter approval. PLF filed a brief in support of the challenge.

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