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Court Rules 'Impact Fees' Assessed on New Development Are Taxes Township Is Not Legally Authorized to Collect

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2010-1548.  Drees Co. v. Hamilton Twp., Slip Opinion No. 2012-Ohio-2370.
Warren App. No. 2009-11-150, 2010-Ohio-3473.  Judgment reversed and cause remanded.
O'Connor, C.J., and Lundberg Stratton, O'Donnell, Lanzinger, Cupp, and Celebrezze, JJ., concur.
Frank D. Celebrezze Jr., J., of the Eighth Appellate District, sitting for McGee Brown, J.
Opinion: http://www.supremecourt.ohio.gov/rod/docs/pdf/0/2012/2012-Ohio-2370.pdf

Video clip View oral argument video of this case.

(May 31, 2012) The Supreme Court of Ohio held today that “impact fees” assessed by a Warren County township on new residential and commercial development projects within its borders to pay for roads, parks, police and fire protection constitute taxes that the township is not legally authorized to collect.

The court’s 7-0 decision, authored by Justice Paul E. Pfeifer, reversed a ruling of the Twelfth District Court of Appeals and reinstated a civil suit filed against Hamilton Township by a group of private development companies and the Home Builders Association of Greater Cincinnati.

In May 2007, the Hamilton Township Board of Trustees adopted a schedule of fees to be charged to applicants for zoning certificates for new construction or redevelopment of property within the unincorporated areas of the township. The trustees’ resolution established four categories of fees: a  road-impact fee, a fire-protection-impact fee, a police-protection-impact fee, and a park-impact fee to offset increased services and improvements the township would need to provide because of the development. 

The fees were phased in over a three-year period.  Since August 2009, owners seeking zoning permits for improvements to property in the assessment area have been assessed the full amount of the impact fees, which add up to $6,153 for a detached single-family home and $7,962 per 1,000 square feet for retail or commercial structures.

The Drees Company and three other residential developers paid the fees under protest, and filed suit against the township and its trustees in the Warren County Court of Common Pleas, seeking a declaratory judgment, injunctive relief, and damages.  Their complaint alleged that the impact fees are contrary to Ohio law and unconstitutional. After the parties submitted stipulated facts and exhibits, both sides moved for summary judgment. The trial court entered summary judgment in favor of the township, finding that the fees were permissible charges based on services that would benefit the properties on which they were assessed. The Twelfth District Court of Appeals affirmed the trial court’s ruling, holding that the impact fees were not a prohibited form of taxation and did not conflict with general laws of the state.

The developers sought and were granted Supreme Court review of the Twelfth District’s ruling.

Writing for a unanimous court in today’s decision, Justice Pfeifer noted that as a limited-home-rule township created under R.C. Chapter 504, Hamilton Township is prohibited from enacting “taxes other than those authorized by general law.” Because there is no dispute between the parties that the impact fees at issue in this case do not fall within the methods of taxation legally permitted for a limited-home-rule township, he wrote, “if the impact fees are actually taxes, they violate R.C. 504.04.”

Citing the Supreme Court of Ohio’s 1991 decision in State ex rel. Petroleum Underground Storage Tank Release Comp. Bd. v. Withrow, Justice Pfeifer wrote:“The fact that the township’s resolution calls the assessments ‘fees’ is certainly not sufficient to establish that the assessments are not taxes.  In order to determine whether certain assessments are taxes, we must analyze ‘the substance of the assessments and not merely their form.’ ... In Withrow, this court considered whether assessments imposed upon owners and operators of underground storage tanks (‘USTs’) by the Petroleum Underground Storage Tank Release Compensation Board were taxes. The assessments helped fund the Petroleum Underground Storage Tank Financial Assurance Fund. That fund was created ‘to reimburse owners and operators of USTs for the costs of corrective actions in the event of a release of petroleum into the environment and to compensate third parties for bodily injury and/or property damage resulting from such occurrences.’”

“This court cited a number of factors in concluding that the assessment in Withrow was not a tax, but a fee. First, this court found it significant that the fees were imposed in furtherance of regulatory measures designed to address the environmental problems caused by leaking USTs; by statute, the owners and operators of USTs were strictly liable to take corrective actions and to pay damages for leaking USTs. ... The fund into which the fees were paid ensured that UST owners could meet those statutory obligations. Second, the assessments were never placed in the general fund and were to be used only ‘for narrow and specific purposes, all directly related to UST problems.’ ... Third, the court noted that ‘[a] fee is a charge imposed by the government in return for a service it provides.’  ...  And it held that in exchange for the fee, the UST owners and operators received protection that resembled insurance.”

“The assessment in this case differs in several important respects from the assessment this court deemed a fee in Withrow. First, the township’s assessment lacks the regulatory aspect of the fee charged in Withrow. Unlike the fee in Withrow, the assessment at issue is not imposed in furtherance of statutes designed to protect the public from harms associated with a specific industry. Rather, it is a revenue generator with the stated purpose of guaranteeing a consistent level of services to all members of the community. ... Second, unlike the fee collected in Withrow, the revenue generated by the assessment in this case is spent on typical township expenses inuring to the benefit of the entire community. ...  Here, although the funds are segregated, the use of the money from the funds is general in nature.  The money is not earmarked so that it is spent to improve the area around the particular property upon which the assessments are imposed; ... there is no requirement that monies placed into the police fund go to create a police substation near a new neighborhood.  Instead, the funds can be spent on any police expenditure throughout the community. Within the specific fund, money is spent in a general way, all toward the normal expenditures of government.”

“Third, this court found that the assessment in Withrow was a fee for a service that the government provided; that is, the fund into which the fees were deposited operated, essentially, as insurance coverage for catastrophic damage caused by leaking tanks. Here, assessed parties get no particular service above that provided to any other taxpayer for the fee that they pay. ... As taxpayers and residents of Hamilton Township, they are entitled to police and fire protection and to use township parks and roadways. ... (T)argets of the assessment receive no greater benefit than any other taxpayer despite the payment of the additional assessment.”

“Overall, an application of the Withrow factors in this case points to the assessments as constituting taxes.”

Justice Pfeifer also cited a 1999 decision of the U.S. Sixth Circuit Court of Appeals, Am. Landfill, Inc. v. Stark/Tuscarawas/Wayne Joint Solid Waste Mgt. Dist., in which that court conducted a Withrow-type analysis to determine whether charges imposed on users of solid waste disposal facilities constituted fees or taxes.

He wrote: “Applying the three-factor test that the court employed in Am. Landfill in this case yields the conclusion that the assessment at issue is a tax. As for the first factor, the entity imposing the assessment in this case is a legislative body, not a regulatory body, which favors characterizing the assessment as a tax.  In regard to the second factor, the entities paying the assessment are not part of a single industry or group. The assessment applies to a fairly large swath of people—anyone who wants to engage in any type of development in the township. However, it also is not imposed on every township resident. That pushes the needle further from a classic tax, but not into the realm of a classic fee. The third factor, the ultimate use of the revenue, places the assessment solidly in the realm of taxation. The fact that the funds from the assessments are segregated into separate accounts is irrelevant; the fact that the revenue is earmarked for police protection, fire protection, road improvement, and parks that benefit the entire community is the key factor. The assessments raise revenue for the public’s benefit. All members of the community will benefit from improved roadways and parks, as well as from consistent levels of police and fire protection.”

“Lest there be any doubt as to whether the impact-fee resolution was designed to affect the whole community, the factual findings in the resolution itself contain statements indicating that maintaining the general welfare of the community is the aim of the resolution. ... The board states in the resolution that ‘the protection of the health, safety, and general welfare of the citizens and property owners of the Township’ requires that the major roadway facilities, fire-protection and police-protection facilities, and the park facilities of the township ‘be improved to maintain them at their current levels of service in order to meet the demands of new development.’”

“Here, the assessment results in no direct service to the landowner, other than the issuance of a zoning certificate, for which there is already a separate $200 fee. When the amount of the fee exceeds the cost and expense of the service, the fee constitutes a tax. ... The impact fees are a revenue-generating measure designed to support infrastructure improvements benefitting the entire township. ... Having analyzed the substance of the assessments, and not merely their form, we conclude that the impact fees charged by Hamilton Township in this case constitute taxes. Since those taxes were not authorized by general law, Hamilton Township was unauthorized to impose them pursuant to R.C. 504.04(A)(1).  Accordingly, we reverse the judgment of the court of appeals and remand the matter to the trial court.”

Justice Pfeifer’s opinion was joined by Chief Justice Maureen O’Connor,  Justices Evelyn Lundberg Stratton, Terrence O’Donnell, Judith Ann Lanzinger and Robert R. Cupp, and Judge Frank D. Celebrezze Jr. of the Eighth District Court of Appeals, who sat by assignment in place of Justice Yvette McGee Brown.

Joseph L. Trauth, 513.579.6515, for the Drees Company and other appellant builders.

Wilson G. Weisenfelder Jr., 513.381.9200, for Hamilton Township.