Opinion ID: 2004064
Heading Depth: 1
Heading Rank: 1

Heading: The Illegal Tax or Fee Claim

Text: Petitioners begin with the premise that the DOCS commission is a tax and, since taxes can be levied only by legislative bodies, DOCS' contractual decision to collect a commission was illegal as it violated the Separation of Powers Doctrine embedded in the New York Constitution ( see generally NY Const, art III, § 1; art XVI, § 1). In the same vein, petitioners assert that, even if not a tax, the commission charges were unlawful because they amounted to fees imposed by a regulatory body that bore no reasonable relationship to the cost of regulation. A tax is a charge that a government exacts from a citizen to defray the general costs of government unrelated to any particular benefit received by that citizen ( see generally American Ins. Assn. v Lewis, 50 NY2d 617, 623 [1980]). Only legislative bodies have the power to impose taxes ( see NY Const, art III, § 1). Municipalities and administrative agencies engaged in regulatory activity can assess fees that need not be legislatively authorized as long as the fees charged [are] reasonably necessary to the accomplishment of the regulatory program ( Suffolk County Bldrs. Assn. v County of Suffolk, 46 NY2d 613, 619 [1979]). In the regulatory arena, fees must bear at least a rough correlation to the expense to which the State is put in administering its licensing procedures or to the benefits those who make the payments receive ( see American Ins. Assn., 50 NY2d at 622; see generally National Cable Television Assn., Inc. v United States, 415 US 336 [1974]). Typically, fees are paid to obtain access to a government service or benefit, such as the fees paid to obtain licenses to practice professions in particular jurisdictions. Beyond imposing taxes and engaging in regulatory activities that generate fees, governmental entities can and do participate in other economic activities through voluntary contractual arrangements with the private sector. For instance, they buy, sell and lease real property, they purchase furniture, computers and other commodities, they sell surplus goods, they operate hospitals and colleges, and they enter into agreements with consultants, contractors and service providers. Although petitioners contend that the DOCS commission constituted exaction of a tax or fee, we conclude that MCI's contractual obligation fell into this other permissible category of governmental activity. For security reasons, DOCS chose to implement an inmate calling plan facilitated by the installation of coinless payphones used by inmates to place station-to-station collect calls. [6] Under the plan, the call recipient was advised that the inmate was calling and then was given the option of accepting or declining the call. If the call was declined, no charges were incurred by the call recipient. If the person agreed to accept the call, the recipient was charged the total telephone services rate, which included the commission MCI was obligated to pay DOCS. In the telephone services industry, a per-call commission is a standard method of compensating the owner of the property where a payphone is located. These commissions have been deemed business expense paid to compensate for the rental and maintenance of the space occupied by the payphone and for access to the telephone user ( Matter of AT & T's Private Payphone Commn. Plan, 3 FCCR 5834, 5836 [1988]). Whether the payphone is positioned in a public airport or a private shopping mall, the owner of the property is entitled to reasonable compensation for allowing the telephone services provider access to its property. And, although other ways of calculating the value of the rent or access charge could certainly be devised, per-call commissions have apparently become the industry standard. Even though this per-call calculation methodology invites the argument that the commission is an additional rate that the provider will undoubtedly pass along to the consumer, commissions have not been viewed by regulatory bodies as a separate tariff. Rather, they are expenses incurred by the telephone services provider, comparable to other types of operating costs, that are encompassed within the tariff ultimately filed with the regulatory agencies and charged to customers ( see e.g. id. ). Not only were such commissions common in the payphone industry but, during the period relevant to this lawsuit, they were often included in other state inmate calling plans where the commission typically ranged from 20% to 63% ( In re Implementation of Pay Tel. Reclassification & Compensation Provisions of Telecom. Act of 1996, 17 FCCR 3248, 3253 n 34 [2002]). [7] Under the contract at issue in this case, the obligation to pay DOCS the commission is imposed on MCI  not call recipients. Although MCI intended to collect the total rate from call recipients (including the portion covering the commission), it owed the commission to DOCS regardless of whether it actually received payment from these consumers. Despite MCI's contractual obligation to forward the access charge to DOCS, the per-call commission was not a tax imposed on the telephone services provider. Of course, having voluntarily participated in the bidding process and entered into an agreement with DOCS, MCI could not, in any event, complain that government compulsion was involved. [8] Given that no tax or fee has been imposed on MCI  the company that is actually obligated to pay the commission  we are not persuaded that the commission was transformed into a tax or fee just because MCI passed this cost on to call recipients along with its other reasonable operating expenses. If the State leased public property that it owned to a commercial retail business at a profitable rent, would customers be able to complain that they had been taxed when the business tenant passed on its rental costs by charging higher prices for its goods? This Court has never held that the government is precluded under the Constitution from charging market rents for its properties, nor have we suggested that, when it does so, its revenues can be no greater than the amount necessary to cover the actual costs associated with ownership or maintenance. Moreover, it is significant that DOCS had no enforcement authority vis-à-vis the call recipient and could not attempt to collect the commission from that consumer if MCI failed to do so, another fact that distinguishes this scenario from a tax ( see e.g. Tax Law § 1133 [b], [c] [allowing State to recover unpaid sales and use taxes from consumers]). Petitioners were given the choice of accepting or rejecting the calls and were charged only if they decided to receive telephone services from MCI. Certainly, the contractual arrangement relates to DOCS' performance of a governmental function  the administration of the prison system  but it lacks the hallmarks of a tax or fee because DOCS has not compelled petitioners to purchase services from MCI, nor are telephone services a government benefit ( see generally Valdez v State, 132 NM 667, 673, 54 P3d 71, 77 [2002] [where call recipients voluntarily accepted inmate calls, rate charged for telephone service was not a tax but was a price at which and for which the public utility service or product is sold]). [9] There was nothing unusual or unique about the commission authorized under the contract between DOCS and MCI because payphone commissions of this type are common within the telephone services industry. DOCS was under no obligation to negotiate a commission  it could have allowed MCI to retain all the profits generated by the calls and, if it had, no colorable claim could have been made that call recipients were being taxed. Yet, it also was not constitutionally required to provide MCI or any other telephone company free access to its facilities, when landowners typically receive compensation for granting such access. [10] In sum, although questionable for other public policy and penological reasons, DOCS' decision to enter into an agreement with MCI that required the telephone services company to pay a commission on telephone calls emanating from coinless payphones on DOCS' properties did not amount to an illegal tax or fee. Finally, even if the DOCS commission is viewed as a tax as petitioners maintain, their claim for refunds would be barred because they failed to pay the rate under protest ( Video Aid Corp. v Town of Wallkill, 85 NY2d 663 [1995]). In the context of this case, the protest requirement would have been fulfilled by a letter to MCI and DOCS at the time the bills were paid objecting that the charge was an illegal tax and indicating that payment was being remitted under protest. Petitioners' allegation that such an obligation was excused on a duress rationale is not supported by our precedent ( City of Rochester v Chiarella, 58 NY2d 316, 323 [1983] [duress . . . is present . . . where payment of a tax is necessary to avoid threatened interference with present liberty of person or immediate possession of property]).