Opinion ID: 2373639
Heading Depth: 3
Heading Rank: 1

Heading: The District Court Misapplied the Constitutional Test for Analyzing the City's Inspection Fee

Text: ¶ 19 We first discuss the City's contention that the district court misapplied the substantive test for determining whether its fee was constitutional. The City argues that the district court erred when it relied on the City's fee-setting procedures as its sole basis for finding the City's inspection fee unconstitutional. It argues that the correct test is whether the amount of the fee bears a reasonable relationship to the cost of regulating the industry and not whether the procedure for enacting the fee is reasonable. We agree with the City. ¶ 20 In determining whether a municipal fee is constitutional, the threshold question is whether the charge is a fee or a tax. See V-1 Oil Co. v. Utah State Tax Comm'n, 942 P.2d 906, 911 (Utah 1996), rev'd on other grounds on rehearing, 942 P.2d 906 (1997). [A] tax raises revenue for general governmental purposes, while a fee raises revenue either to compensate the government for the provision of a specific service or benefit to the one paying the fee or to defray the government's costs of regulating and policing a business or activity engaged in by the one paying the fee.... ... [T]here are at least two broad types of fees: (i) a fee for service, i.e., a specific charge in return for a specific benefit to the one paying the fee, and (ii) a regulatory fee, i.e., a specific charge which defrays the government's cost of regulating and monitoring the class of entities paying the fee. Id. Because both parties concede that the City's inspection charge is a regulatory fee, we analyze it under our constitutional test for regulatory fees. ¶ 21 To determine whether a regulatory fee is constitutional, we have established both procedural and substantive guidelines. Home Builders Ass'n v. City of N. Logan, 1999 UT 63, ¶ 8, 983 P.2d 561. Our procedural guidelines allocate burdens of proof between municipalities and challengers of fees. Id. Under these guidelines, a municipality must first `disclose the basis of its calculations to [whoever] challenges the reasonableness of' the fee. Id. (alteration in original) (quoting Banberry Dev. Corp. v. S. Jordan City, 631 P.2d 899, 904 (Utah 1981)). The burden then falls upon the challenger to `show[] failure to comply with the constitutional standard of reasonableness.' Id. (alteration in original) (quoting Banberry, 631 P.2d at 904). ¶ 22 The substantive test for determining whether a regulatory fee is reasonable recognizes that a presumption of constitutionality attaches to a municipality's decision to enact a regulatory fee. [2] Id. ¶ 9. This presumption can be overcome if the challenger shows that the fee is unreasonable. See V-1 Oil Co., 942 P.2d at 912. To show that a regulatory fee is unreasonable, it is not enough for a challenger to contest the procedure by which the city arrived at its fee calculations. See City of N. Logan, 1999 UT 63, ¶ 13, 983 P.2d 561. Rather, the challenger must establish that the fee is unreasonable by demonstrating that the fee does not bear a reasonable relationship to the cost of regulating the industry. See id.; V-1 Oil Co., 942 P.2d at 912; see also Salt Lake City v. Bennion Gas & Oil Co., 80 Utah 530, 15 P.2d 648, 650 (1932) (holding the amount of the inspection fee is not a judicial question; it rests with the Legislature to fix the amount, and it can only present a valid objection when the fee is so unreasonable and disproportionate to the services rendered as to attack the good faith of the law (internal quotation marks omitted)). [3] ¶ 23 In Home Builders Ass'n of Utah v. City of American Fork, we addressed a similar question of whether a municipality's failure to use any formula to establish its impact fees would necessarily result in the conclusion that the fees were unreasonable. 1999 UT 7, ¶¶ 18-20, 973 P.2d 425. In City of American Fork, the City of American Fork had failed to consider the Banberry factors, a list of seven factors that we established as being relevant to establishing impact fees. Id. ¶ 20; Banberry, 631 P.2d at 903-04. We concluded that the city's failure to use a mathematical formula to calculate its impact fee was not dispositive of the issue of reasonableness. Id. ¶ 18. We explained that fee setting procedures, such as the Banberry factors, were merely means to [an] end. Id. ¶ 20. And the ultimate legal test is whether the impact fees relate to the cost of the benefits conferred on those paying the fees. Id. ¶¶ 14, 20. ¶ 24 As was the case in City of American Fork, the fact that the City did not employ any mathematical formula in setting its inspection fee is not dispositive. The ultimate legal test in determining whether a regulatory fee is constitutional is whether the fee relates to the cost of regulating the industry, not whether the fee-setting procedure was reasonable. ¶ 25 In this case, the district court found that the City's inspection expenses exceeded its fee revenues from the period of July 1, 1998, to June 30, 2003. But it nevertheless held that the City's inspection fee was unconstitutional because it concluded that the City's fee-setting procedure was unreasonable. Specifically, the district court took issue with the fact that the City did not ascertain its actual inspection costs before implementing its inspection fee. It concluded that the City's method of setting its fee based on a survey of what neighboring municipalities charged was an unreasonable and [un]scientific approach to setting its fee. By focusing on the City's fee setting procedure, rather than the reasonableness of the fee itself, the district court erred.