Title: Board of Directors v. City of Richmond

State: virginia

Issuer: Virginia Supreme Court

Document:

Present:  All the Justices 
 
BOARD OF DIRECTORS OF THE 
TUCKAHOE ASSOCIATION, INC. 
 
v.  Record No. 980343   OPINION BY JUSTICE BARBARA MILANO KEENAN 
 
 
 
January 8, 1999 
CITY OF RICHMOND 
 
 
FROM THE CIRCUIT COURT OF THE CITY OF RICHMOND 
Theodore J. Markow, Judge 
 
 
 
In this appeal, we consider the trial court's rulings that:  
1) a city ordinance imposing utility taxes is unconstitutional 
on equal protection grounds, and 2) a condominium unit owners' 
association, which purchased utility services at commercial 
rates, should be taxed as a residential purchaser under the 
ordinance. 
 
The Tuckahoe Association, Inc. (the Association), a non-
stock corporation organized under the Virginia Condominium Act, 
Code §§ 55-79.39 – 79.103, is comprised of the individual unit 
owners of the Tuckahoe Condominium.  The condominium property 
consists of one building containing 68 residential units and a 
parking lot for the use of unit owners and their guests. 
 
The Association purchases at commercial rates electricity 
from the Virginia Power Company and natural gas from the 
Richmond Department of Public Utilities.  The amount of 
electricity purchased is registered on one master meter and the 
amount of gas purchased is registered on two master meters.  The 
Association purchases these utility services with funds received 
from the individual unit owners' annual assessments.  By 
purchasing these services at commercial, rather than 
residential, rates, the Association pays a significantly lower 
amount for such services. 
 
Pursuant to § 2.02 of its City Charter, the City of 
Richmond enacted an ordinance imposing a utility tax on 
telephone, electric, and gas service, which is collected by the 
seller of each service.  Richmond, Va., Code § 27-152.1.  The 
ordinance establishes different tax rates for purchasers of 
commercial and residential service.  Id.  The terms 
"residential" and "commercial" are not defined in the ordinance.  
Since the Association purchased electric and gas services from 
the utility providers at commercial rates, the City imposed its 
commercial tax rate on those purchases. 
 
The Association filed a motion for judgment under Code 
§ 58.1-3984 to correct the City's allegedly erroneous assessment 
of utility taxes.  The Association alleged that it was a 
"residential user" of the utility services and was entitled to a 
refund of the amount of utility taxes paid "in excess of the 
residential [tax] rate [it] should properly be charged."  The 
Association further alleged that the City's "classification of 
[the Association] for purposes of the subject utility tax, not 
having a reasonable basis for a commercial classification, is 
 
2
wholly arbitrary" and violates the equal protection clauses of 
the United States and Virginia Constitutions. 
 
The City responded that its utility tax ordinance expressly 
classifies taxpayers based on the type of utility service 
purchased, rather than on the nature of the ultimate consumer of 
the service.  Since the Association admitted that it purchases 
commercial gas and electric service and is billed for those 
services at the more advantageous commercial rates, the City 
maintained that the Association was not entitled to be taxed for 
those services under a residential classification. 
 
After hearing argument on the parties' motions for summary 
judgment, the trial court ruled that the residential and 
commercial classifications contained in the ordinance are "not 
based on real differences" and, thus, are arbitrary and 
unreasonable.  The court held that the ordinance 
unconstitutionally delegates to the utility companies the right 
to determine, based on their own internal regulations, who 
qualifies for the more favorable residential service taxation 
rate.  The court concluded that "[a]s [the Association] has 
successfully rebutted the reasonableness of the [City's] 
commercial/residential classification, the court invalidates 
this utility taxation scheme on equal protection grounds." 
 
In an order denying the City's motion to reconsider, the 
trial court stated that "the Richmond utility tax in this case 
 
3
is 'fatally indefinite' — it is literally devoid of any means to 
determine how any utility service customer should be categorized 
by the service provider for tax purposes. . . . [E]ach and every 
customer classification is based upon utility company guesswork 
and internal guidelines foreign to the ordinance itself." 
 
The Association then filed an amended motion for judgment 
seeking, in the alternative, a full refund of all utility taxes 
paid from January 1993 through September 1997, or a refund of 
utility taxes paid in excess of the residential rate during that 
time period.  The City filed a counterclaim, alleging that if it 
had applied the residential tax rate to the Association's 
utility purchases, the City would have assessed the utility tax 
against each individual unit.  The City alleged that, under this 
methodology, the total amount of utility taxes owed by the 
Association was greater than the amount of taxes the Association 
actually paid at the commercial rate.  The City requested 
judgment pursuant to Code § 58.1-3903 in the amount of the 
alleged underpayment. 
 
At a hearing to determine damages, the City presented the 
testimony of Andrew Roundtree, the City official responsible for 
assessing the City's utility tax.  Roundtree testified that if 
the City were required to apply its residential tax rate to the 
utility services supplied to the Tuckahoe Condominium, the City 
would treat each unit owner as a residential customer.  Since 
 
4
the units do not have individual meters, Roundtree explained 
that he would divide the Association's total electric and gas 
service charges by the number of individual units in order to 
determine an average charge per unit.  He would then apply the 
tax rate to this average charge and multiply that amount by 68 
to determine the total amount due from the Association.  
Roundtree testified that, under this method, the Association 
would owe $190.61 more for the time period at issue than the tax 
that was actually assessed at the commercial tax rate. 
 
The trial court entered a final order holding that the 
Association "should be classified as 'residential' for purposes 
of the City's utility tax scheme."  In reaching this conclusion, 
the court relied on § 27-151 of the City Code, which defines 
"purchaser" as "every person who purchases a utility service."  
The court stated that "each household/end-user at the Tuckahoe 
building purchases these services on an individual basis through 
its pro rata share of total condominium consumption."  The court 
found that the Association would have paid an additional $190.61 
in utility taxes if the 68 individual units had been taxed at 
the City's residential rate.  On this basis, the court awarded 
judgment on the counterclaim in favor of the City in that 
amount.  This appeal followed. 
 
In reviewing the ordinance, we address the City's 
assignments of cross-error because they determine the outcome of 
 
5
this appeal.  The City first contends that the trial court erred 
in holding that the ordinance is unconstitutional, because the 
tax classifications are reasonable, and do not effectively 
delegate the authority to the utility providers to determine the 
rate at which purchasers of utility services will be taxed. 
 
In response, the Association contends that the ordinance's 
classifications are arbitrary, and that the ordinance improperly 
delegates taxing authority to the utility providers by allowing 
the providers to determine which purchasers qualify for the 
different categories of services on which the tax is based.  We 
disagree with the Association. 
 
The trial court did not specify in its ruling whether it 
found the ordinance facially invalid or merely invalid as 
applied to the Association.  Because the court's ruling 
incorporates principles derived from each of these concepts, we 
review the constitutionality of the ordinance in both contexts. 
 
When scrutinizing a tax classification contained in an 
ordinance on equal protection grounds, we begin with the basic 
principle that a government has broad powers of classification 
for taxation purposes.  See Cox Cable Hampton Roads, Inc. v. 
City of Norfolk, 247 Va. 64, 66, 439 S.E.2d 366, 367 (1994).  
The constitutional guarantee of equal protection does not 
mandate that taxpayers be given identical treatment under a 
 
6
taxation statute.  Id., 439 S.E.2d at 367-68.  Instead, we have 
said that this guarantee 
"'only requires that the classification rest on real 
and not feigned differences, that the distinction have 
some relevance to the purpose for which the 
classification is made, and that the different 
treatments not be so disparate, relative to the 
difference in classification, as to be wholly 
arbitrary.'  Walters v. City of St. Louis, Mo., 347 
U.S. 231, 237 (1954).  If the classification is 
reasonable and not arbitrary, uniformity and equality 
are not required." 
 
Id. at 66-67, 439 S.E.2d at 368, (quoting City of Portsmouth v. 
Citizens Trust Co., 216 Va. 695, 698, 222 S.E.2d 532, 534 
(1976)); see also City of Richmond v. Fary, 210 Va. 338, 343-44, 
171 S.E.2d 257, 261 (1969). 
 
Like the ordinance in which they are found, the 
classifications contained in an ordinance are presumptively 
valid.  Sheek v. City of Newport News, 214 Va. 288, 290, 199 
S.E.2d 519, 521 (1973); Kisley v. City of Falls Church, 212 Va. 
693, 697, 187 S.E.2d 168, 171 (1972).  This presumption of 
validity governs unless it is rebutted by unreasonableness 
apparent on the face of the ordinance or by extrinsic evidence 
clearly establishing unreasonableness.  Sheek, 214 Va. at 290, 
199 S.E.2d at 521; Kisley, 212 Va. at 697, 187 S.E.2d at 171; 
National Linen Service Corp. v. Norfolk, 196 Va. 277, 279, 83 
S.E.2d 401, 403 (1954).  Thus, if a classification has some 
reasonable basis and reasonably relates to the legislative 
 
7
objective of the ordinance, the local government may treat 
different classes in different ways.  Duke v. Pulaski County, 
219 Va. 428, 433, 247 S.E.2d 824, 827 (1978). 
 
We conclude that the present ordinance is facially valid.  
Since the ordinance's classifications are based on the type of 
utility service purchased, they contain distinctions resting on 
real and not feigned differences.  As evidenced by the record, 
these distinctions are related to the apparent purpose of the 
classifications, which is to allocate fairly the tax burden 
imposed on utility service purchasers.  The Association admitted 
in the trial court that by purchasing commercial utility 
services, it pays significantly less for its electricity and 
natural gas than it would if it purchased residential utility 
services in the same quantities.  The utility tax 
classifications contained in the City's ordinance impose a 
greater tax rate on such volume purchasers who receive the 
benefit of a lower purchase price from the utility provider.  
Conversely, purchasers of residential service who pay a higher 
unit cost than commercial purchasers for their utility services 
are given the benefit of a lower tax rate.  We hold that such 
distinctions are not unreasonable or so disparate in their 
treatment as to be arbitrary, and that the trial court erred in 
concluding otherwise. 
 
8
 
We also disagree with the trial court's ruling that the 
ordinance's classifications effectively delegate governmental 
authority, allowing the utility providers to "pick and choose" 
which purchasers will be deemed eligible for the lower 
residential tax rate.  Under the ordinance, the utility 
providers' role is limited to collecting the utility tax.  The 
providers do not determine the particular rate of tax each 
purchaser must pay. 
 
When any individual or entity has purchased commercial 
service from the provider, the provider is directed to collect 
taxes based on the fixed commercial rate set by the ordinance.  
Likewise, the utility provider is required to collect taxes due 
from any purchaser of residential service at the fixed 
residential rate contained in the ordinance.  Although the trial 
court reasoned that it is within the utility provider's sole 
discretion to determine what type of service each customer 
receives, we find no evidence in the record supporting such a 
conclusion.  The Association failed to prove its contention that 
the utility providers control the ultimate tax imposed on a 
customer by internal company rules regulating the availability 
of commercial and residential services to a given purchaser. 
 
Since there is no language in the ordinance or evidence in 
the record to show that the utility providers exercise 
discretionary authority under the ordinance, we find no merit in 
 
9
the Association's contention that the present case is controlled 
by Chapel v. Commonwealth, 197 Va. 406, 89 S.E.2d 337 (1955).  
There, we held that a former statute known as the Dry Cleaners 
Act was invalid, because it delegated to the State Dry Cleaners 
Board the power to promulgate rules and regulations controlling 
dry cleaning businesses, without fixing any standard to guide 
and control the Board's exercise of its discretion.  Id. at 413-
14, 89 S.E.2d at 342.  Unlike the statute at issue in Chapel, 
the present ordinance does not delegate discretionary authority 
to the utility providers.  Thus, we hold that the trial court 
erred in ruling that the ordinance is invalid on this basis. 
 
We also note that the record fails to support a conclusion 
that the ordinance is unconstitutional as applied to the 
Association.  The Association did not present evidence that it 
was treated differently under the ordinance from any other 
residential condominium unit owners' association with master 
metering devices.  The Association also failed to demonstrate 
that the ordinance's application of the commercial utility tax 
classification to its purchases of commercial utility service 
was arbitrary or unreasonable. 
 
We next consider the City's assignment of cross-error that 
the trial court erred in ruling that the Association was 
entitled to be classified as a purchaser of residential utility 
services.  The City argues that, under the plain language of the 
 
10
ordinance, the Association's purchase of commercial utility 
services required that it be taxed at the commercial rate. 
 
In response, the Association contends that the trial court 
properly ruled that the Association is entitled to be classified 
as a residential purchaser, because the Tuckahoe complex is used 
solely as a place of residence.  The Association also argues 
that since the ordinance classifies taxpayers based on the type 
of service purchased, rather than the commercial or residential 
nature of the purchaser of those services, the ordinance 
conflicts with Code § 58.1-3814.  We disagree with the 
Association. 
 
As stated above, the trial court based its ruling on the 
reasoning that each "household/end-user at the Tuckahoe building 
purchases these services on an individual basis through its pro 
rata share of total condominium consumption."  This conclusion, 
however, is directly refuted by the evidence, which showed that 
the Association, a non-profit corporation, actually contracted 
and paid for the utility services recorded on its master meters.  
The fact that the individual unit owners' assessments are the 
source of funds for payment of the corporation's obligations 
does not alter the nature of those obligations or make the unit 
owners purchasers under the ordinance. 
 
The authority of a city to impose a tax by ordinance 
depends upon a positive grant of authority by the General 
 
11
Assembly.  Hampton Nissan Ltd. Partnership v. City of Hampton, 
251 Va. 100, 104, 466 S.E.2d 95, 97 (1996); Williams v. City of 
Richmond, 177 Va. 477, 484, 14 S.E.2d 287, 289 (1941).  If the 
city's charter grants a particular power to the city, an 
ordinance passed pursuant to that grant has the same status as 
an act of the General Assembly.  Id.; Gordon Bros. v. City of 
Newport News, 102 Va. 649, 650-51, 47 S.E. 828, 829 (1904). 
 
Here, § 2.02 of the City's charter, enacted by the General 
Assembly, authorizes the City "to levy on and collect taxes from 
purchasers of any public utility service used within the city, 
which taxes may be added to and collected with the bills 
rendered purchasers of such service."  1948 Va. Acts of 
Assembly, ch. 116.  This grant of power plainly provides that 
the purchasers, rather than the ultimate consumers or "end-
users," of such utility services are the proper objects of 
taxation.  The City's ordinance reflects this authority granted 
by the charter, by imposing utility taxes only on the actual 
purchasers of utility services who are rendered a bill for those 
services. 
 
We also find no merit in the Association's contention that 
it is a "residential customer" within the meaning of Code 
§ 58.1-3814 and, thus, that the ordinance conflicts with the 
statute.  Code § 58.1-3814 provides, in relevant part: 
 
12
 
A. Any county, city or town may impose a tax on 
the consumers of the utility service or services 
provided by any water or heat, light and power 
company. . . which tax shall not be imposed at a rate 
in excess of twenty percent of the monthly amount 
charged to consumers of the utility service and shall 
not be applicable to any amount so charged in excess 
of fifteen dollars per month for residential 
customers.  Any city, town or county that on July 1, 
1972, imposed a utility consumer tax in excess of 
limits specified herein may continue to impose such a 
tax in excess of such limits, but no more. 
The Association contends that the purpose of the statute would 
be defeated if it is denied the benefit of the residential 
utility tax "cap" and charged a commercial tax, merely because 
it took advantage of the best available utility rates offered by 
the utility providers.  We disagree. 
 
In authorizing local governments to levy a utility tax on 
"consumers" of utility services, Code § 58.1-3814 places a limit 
on the amount of tax that can be imposed on a "residential 
customer."  As a commercial purchaser of utility services, the 
Association is a "consumer" of those services, notwithstanding 
the fact that the unit owners are the "end-users" of most of the 
services provided.  However, the Association is not a 
"residential customer" of the utility providers, within the 
meaning of the statute, because it does not purchase residential 
service from those providers.  The unit owners also are not 
"residential customers" of the utilities, because they do not 
individually contract and pay for their electric and gas 
 
13
service.  Therefore, neither the Association nor the individual 
unit owners are entitled to the benefit of the "cap" provided to 
"residential customers" under the statute. 
 
Based on the above holding, we conclude that the trial 
court erred in ruling that the Association was entitled to be 
"classified as residential for purposes of the City's utility 
tax scheme."   We also conclude that the trial court erred in 
ruling that the individual unit owners should be treated as 
purchasers of residential utility services, and that the 
Association's utility tax should be computed on this basis. 
 
For these reasons, we will reverse the trial court's award 
of summary judgment in favor of the Association on its motion 
for judgment, reverse the court's judgment in favor of the City 
on its counterclaim, and enter final judgment for the City on 
the motion for judgment. 
Reversed and final judgment.
 
14