Opinion ID: 2102268
Heading Depth: 2
Heading Rank: 1

Heading: Tax Versus Licensing Fee

Text: The Superior Court concluded that DOH's annual approval fee was a valid licensing measure designed to defray the costs involved in DOH's regulation of public drinking-water supply systems in this state, and that, therefore, petitioner was obliged to pay this fee to DOH. To determine whether legally competent evidence exists to support its judgment, our starting point is the statutory language authorizing DOH's director to impose this charge. See § 46-13-1 (The purpose of this chapter is to aid in assuring the public is provided with safe and potable drinking water.); § 46-13-2.1(a)-(b) (providing that all public water-supply-systems operators must apply for and receive DOH-director approval); § 46-13-2.1(c) (requiring the DOH director to establish by regulation an initial [approval] fee and an approval renewal fee    related to the costs incurred in operating the [water-supply] program). After giving these provisions their plain and ordinary meaning, see Fleet National Bank v. Clark, 714 A.2d 1172, 1177 (R.I.1998), it is manifest that the General Assembly has characterized this DOH charge as an annual approval fee and not as a tax. Although this designation is not dispositive, we accord it substantial deference even as we acknowledge the statutory pedestal on which petitioner rests its casenamely, its tax-exempt status as delineated in G.L.1956 § 39-16-13. [2] The petitioner asserts that because the DOH fee is actually a tax or an assessment in lieu of taxes, § 39-16-13 exempts it from having to pay such a fee. Again, we accord § 39-16-13 its plain and ordinary meaning and conclude that the General Assembly did indeed intend to exempt petitioner from taxation and from paying sums in lieu of taxes, save for those payments in lieu of taxes described in § 39-16-14. [3] Consequently, the pivotal question in this case is whether DOH's § 46-13-2.1(c) approval fee is a licensing measure that applies not only to petitioner but to all other operators of public water-supply systems, or whether it is a de facto tax or a sum in lieu of taxation from which petitioner is exempt under § 39-16-13. The Superior Court concluded that it was the former and thus upheld DOH's imposition of this fee. Our role on certiorari is to ascertain whether legally competent evidence exists in the record to support this determination. Tax exemptions, which exist solely by virtue of legislative grace, see Gott v. Norberg, 417 A.2d 1352, 1358 (R.I.1980), arise only from constitutional or statutory provisions, see Woonsocket Hospital v. Quinn, 54 R.I. 424, 428, 173 A. 550, 552 (1934). Any taxpayer claiming entitlement to a statutory tax exemption carries the burden of proving that the assessment in question falls within the terms of the exemption. See Dart Industries, Inc. v. Clark, 696 A.2d 306, 310 (R.I.1997). To show that it qualified for the claimed tax exemption, petitioner needed to establish that DOH's annual approval fee was in fact a tax (or a sum in lieu of taxation) because a true licensing fee would not fall within the ambit of its § 39-16-13 tax exemption. After examining the record, we conclude that petitioner failed to carry its burden of proof in this regard. We have previously noted the distinction between a taxwhich is primarily a revenue-raising measureand a licensing feewhich is primarily a regulatory imposition. See State v. Foster, 22 R.I. 163, 171, 46 A. 833, 835-36 (R.I.1900) (If the imposition    has for its primary object the regulation of the business, trade, or calling to which it applies, its exercise is properly referable to the police power; but, if the main object is the obtaining of revenue, it is properly referable to the taxing power.); see also Berberian v. Kane, 425 A.2d 527 (R.I.1981) (holding that annual dues paid to the state bar association are license fees, not taxes); Petition of Rhode Island Bar Association, 118 R.I. 489, 374 A.2d 802 (1977) (same); cf. Sinclair Paint Co. v. State Board of Equalization, 15 Cal.4th 866, 64 Cal.Rptr.2d 447, 937 P.2d 1350, 1358 (Cal.1997) ([A]ll regulatory fees are necessarily aimed at raising `revenue' to defray the cost of the regulatory program in question, but that fact does not automatically render those fees `taxes.'    [I]f regulation is the primary purpose of the fee measure, the mere fact that the measure also generates revenue does not make the imposition a tax.) (Emphasis in original.) Here, legally competent evidence indicates that DOH's annual approval fee is primarily a licensing charge to defray the costs incurred by DOH in connection with its regulation of water-supply systems in this state. Section 46-13-2.1(c) explains that the purpose for which DOH collects the annual approval fee is to pay for the costs incurred in operating the [public water-supply approval] program. These costs include expenditures incurred by DOH to (1) review and analyze applications for approval, including any supporting documents, that have been submitted by petitioner and by other public water-supply-systems operators for the purpose of securing DOH's annual approval to operate such systems, and (2) conduct inspections of the public water-supply systems subject to its jurisdiction to determine if they meet the requirements for approval. See § 46-13-2.1(b)-(c). Section 46-13-2.1(c) continues: [t]he fees as established by the director shall be related to the costs incurred in operating the program and may include administrative, personnel, equipment, laboratory services and such other related costs necessary to carry out the provisions of this section of the law. All fees collected under this section shall be deposited as general revenues. Id. In an effort to establish a fair and equitable annual fee to defray these approval costs, the Legislature created an advisory committee to assist the DOH director in this endeavor. According to the testimony of June Swallow (Swallow), the Chief of the Office of Drinking Water Quality (ODWQ) at DOH, this committee was comprised of state senators, representatives, and members of the water-system community and was modeled on a similar Environmental Protection Agency consulting group. After considering the revenue needs of both ODWQ and DOH, ODWQ's workload, the requirements under the Safe Drinking Water Act, chapter 13 of title 46, and various possible alternative fee scenarios, the committee recommended a three-tiered annual fee for licensure schedule that would enable DOH to recoup the likely costs it would incur in fulfilling its regulatory obligations. DOH accepted this recommendation and adopted the following fee schedule: Transient non-community water system.... $150. Nontransient [ sic ] non-community water system.$250. Community water system .. $1.10 per connection: minimum fee = $250. maximum fee = $25,000. Rhode Island Department of Health, Rules and Regulations Pertaining to Public Drinking Water, § 2.3(c)(2) (as amended Aug. 1996). Furthermore, DOH determined that because petitioner served approximately 24,600 water-service connections, [4] it was large enough to qualify for the maximum-fee category, thereby obliging it to remit a $25,000 fee annually. The petitioner failed to carry its burden of showing that the $25,000 licensing fee assessed to petitioner was unrelated to the costs of DOH's regulation. Rather, because the record shows that DOH's overall costs per annum to regulate the water systems subject to its jurisdiction approximated the annual revenues attributable to the approval fees it charged, these fees qualified as lawful licensing assessments. Specifically, Swallow testified that DOH needed these approval funds to pay for personnel operating costs and contractual work that [DOH] had done to assist    with the regulating of water systems which were required by law to obtain DOH's approval to operate. She further testified that the General Treasurer placed the approval-fee receipts in an account reserved for ODWQ use only. The evidence also established that, for the years in question, the funds in these accounts roughly equaled DOH's expenditures in implementing this water-system-approval program. According to the testimony of the Chief of Budget and Finance, Thomas Mullaney (Mullaney), DOH's expenditures in fiscal-year 1994, relative to regulating water systems under its jurisdiction, exceeded the amount of funds in this restricted account by $5000, [5] whereas in fiscal-year 1995, the amount in the restricted-receipt account ($365,000) exceeded DOH's regulatory expenditures by $5,500. In those two years, he stated, the General Treasurer withdrew no money from those two accounts, although, as Swallow testified, 7 percent of these funds (termed an overhead charge relating to the state's maintenance of the account) were paid into the general treasury. Finally, although the 1996 Appropriations Act abolished the restricted-receipt account, the General Assembly nonetheless appropriated state funds to DOH equal to the state's anticipated receipts from the water systems subject to its regulatory approval. The mere fact that DOH deposited these funds into the general treasury does not ipso facto convert them into taxes. See Opinion to the Governor, 92 R.I. 489, 170 A.2d 284 (1961); see also Sinclair Paint Co. v. State Board of Equalization, 15 Cal.4th 866, 64 Cal.Rptr.2d 447, 937 P.2d 1350 (Cal. 1997). As long as the annual approval fee's primary purpose and effect was to pay for DOH's costs in carrying out its statutory duty to regulate the state's water-supply systems under its jurisdiction, and as long as the total revenues generated by these fees were roughly equivalent to DOH's costs in implementing such regulation, then such fees are, by definition, an annual licensing measure, albeit an ancillary consequence of imposing such fees is an increase in revenue raised by DOH and, thus, by the state. In sum, we conclude that legally competent evidence exists in the record to support the Superior Court's conclusion that the imposition of DOH's § 46-13-2.1 annual approval fees upon petitioner constituted a lawful licensing measure, and that petitioner may not rely upon its § 39-16-13 tax exemption to avoid its obligation to pay these fees.