To: Bruce Nustad, MN Retailers Association Date: November 8, 2019 RE: Legal analysis of the authority of a Minnesota municipality to impose a 5-cent charge on grocery and retail purchase bags at check-out. QUESTION: Does a local unit of government have the authority to impose a 5-cent charge per bag at checkout without first receiving express permission through state legislation? Short Answer: Despite being labeled a "fee," this proposed bag charge fits the definition of a tax requiring state authority before being imposed by a municipality. ANALYSIS A municipality cannot, without special state legislation, impose a sales or income tax, and cannot avoid the statutory requirements of imposing taxes by labeling a new charge a "fee." Because a tax is any charge imposed by a governmental entity on "an individual, person, entity, transaction, good, service or other thing," a new charge imposed on bags requires special state legislation. While local jurisdictions can raise revenue through property tax levies, the state has prohibited local units of government from imposing taxes on sales or income. 1 The Minnesota Supreme Court in 2018 considered the issue of nomenclature - whether a fee was actually a tax. The court's analysis in Phone Recovery Services, LLC v. Qwest Corporation 2 is instructive: "Minnesota Statutes § 645.44 (2016), provides various definitions for common terms “used in Minnesota Statutes or any legislative act.” These definitions 'shall' apply across all other Minnesota Statutes, 'unless another 1 Minn. Stat. Ch. § 477A.016. State law allows local jurisdictions to seek state special laws for sales tax, but only for capital projects. Minn. Stat. Ch. § 297A.99. 2 919 N.W.2d 315, 323–24 (Minn. 2018).
Transcript
To: Bruce Nustad, MN Retailers Association Date: November 8, 2019 RE: Legal analysis of the authority of a Minnesota municipality to impose a 5-cent charge on
grocery and retail purchase bags at check-out. QUESTION: Does a local unit of government have the authority to impose a 5-cent charge
per bag at checkout without first receiving express permission through state legislation?
Short Answer: Despite being labeled a "fee," this proposed bag charge fits the definition of a tax requiring state authority before being imposed by a municipality.
ANALYSIS
A municipality cannot, without special state legislation, impose a sales or income tax, and cannot avoid the statutory requirements of imposing taxes by labeling a new charge a "fee." Because a tax is any charge imposed by a governmental entity on "an individual, person, entity, transaction, good, service or other thing," a new charge imposed on bags requires special state legislation. While local jurisdictions can raise revenue through property tax levies, the state has prohibited local units of government from imposing taxes on sales or income.1 The Minnesota Supreme Court in 2018 considered the issue of nomenclature - whether a fee was actually a tax. The court's analysis in Phone Recovery Services, LLC v. Qwest Corporation2 is instructive:
"Minnesota Statutes § 645.44 (2016), provides various definitions for common terms “used in Minnesota Statutes or any legislative act.” These definitions 'shall' apply across all other Minnesota Statutes, 'unless another
1 Minn. Stat. Ch. § 477A.016. State law allows local jurisdictions to seek state special laws for sales tax, but only for capital projects. Minn. Stat. Ch. § 297A.99. 2 919 N.W.2d 315, 323–24 (Minn. 2018).
Page
2
intention clearly appears.' Minn. Stat. § 645.44, subd. 1. 'Tax' and 'fee' are defined in section 645.44 as follows: (a) 'Tax' means any fee, charge, exaction, or assessment imposed by a governmental entity on an individual, person, entity, transaction, good, service, or other thing. It excludes a price that an individual or entity chooses voluntarily to pay in return for receipt of goods or services provided by the governmental entity. A government good or service does not include access to or the authority to engage in private market transactions with a nongovernmental party, such as licenses to engage in a trade, profession, or business or to improve private property. (b) For purposes of applying the laws of this state, a 'fee,' 'charge,' or other similar term that satisfies the functional requirements of paragraph (a) must be treated as a tax for all purposes, regardless of whether the statute or law names or describes it as a tax. The provisions of this subdivision do not exempt a person, corporation, organization, or entity from payment of a validly imposed fee, charge, exaction, or assessment, nor preempt or supersede limitations under law that apply to fees, charges, or assessments. Minn. Stat. § 645.44, subd. 19. Thus, the Legislature has broadly defined 'tax' to include fees or charges imposed by government, regardless of whether the Legislature 'name[d] or describe[d]' the charge as a tax (with the exception stated in subdivision 19(a) for prices that persons voluntarily pay 'in return for receipt of goods or services')."3
The court held that 911 fees, the Telecommunications Access Minnesota surcharge, and the Telephone Access Program surcharge imposed by statute and collected by private phone companies from customers are, in fact, taxes.4 Based on Minnesota statutes and caselaw, a local jurisdiction cannot skirt prohibitions on imposing a local sales tax by merely labeling a proposed charge a "fee." Whether a particular charge imposed by a city government is an exercise of the taxing power or the police power (to act in the interest of the general health and welfare of citizens) is determined by the primary purpose of the charge.5 A municipality's police power does not extend to allow revenue raising measures.6 If a city's true motivation is not merely to
3 Id. (bold emphasis added). 4 Id. 5 First Baptist Church of St. Paul v. City of St. Paul, 884 N.W.2d 355, 359 (Minn. 2016) (citing Farmers Ins. Grp. v. Comm'r of Taxation, 278 Minn. 169, 174, 153 N.W.2d 236, 240 (1967)). A home-rule charter city's Right of Way assessment was a tax and not a fee for services. 6 Country Joe, Inc. v. City of Eagan, 560 N.W.2d 681, 686 (Minn.1997). The court held that a statutory city road unit connection "charge" was held to be an illegal tax.
Page
3
recover the costs of regulation, the charge is a tax.7 The difference between a tax and a fee is "The crucial question is not what power a city exercises when it uses the funds collected, but rather what power a city exercises when it collects the funds."8 The city's characterization of the nature of the charge is relevant, but not conclusive.9 In First Baptist Church of St. Paul, the court identified the features of a new "Right of Way assessment" that the court used to analyze whether a charge was a fee or a tax.10 The court held that the city's11 proposed an assessment on nonprofits was a tax and not a fee imposed under the city's police power. The features leading the court to conclude it was a tax included, among others and in relevant part: (1) recurring assessments, (2) imposed city wide, (3) benefiting the general public.12 Similar to First Baptist, a bag "fee" mandated by a municipality on businesses and charged to customers using bags to carry their items at a point of sale is (1) a recurring assessment on each bag, and (2) imposed city-wide at the point of sale. The third feature described by the court in First Baptist is also met because the basis for imposing such a charge does not correlate with an administrative burden of the city. Current proposals considered in Duluth and Minneapolis do not require remittance of the charges collected by stores back to the municipalities. Rather, current proposals require the per bag charge to be collected, but also allow business owners to keep the funds collected. This is a thinly veiled attempt to avoid the characterization of the charge as a tax. even if not remitted to a city's coffers, the fact that the city raises revenue under these proposals suggests that this is a tax and not a fee paying covering administrative costs incurred by the city. For these reasons, the proposed bag "fee" is a tax and requires state legislation before a municipality can impose it. Given that the state has not conferred general sales or income taxing authority on to municipalities, proposers attempt to blur the line by allowing the businesses collecting it to keep it and invoke their police authority to protect the general welfare of citizens. While the state of Minnesota imposes fees on substances considered harmful or with detriment to health or environment, I can find no example where a municipality has done this under its police authority, but rather state legislation is required. For example, Minnesota state law - not municipal
7 Id. (citing Country Joe, 560 N.W.2d at 686.) 8 Harstad v. City of Woodbury, 902 N.W.2d 64, 74 (Minn. Ct. App. 2017), review granted (Nov. 28, 2017), aff'd, 916 N.W.2d 540 (Minn. 2018) (citing First Baptist Church of St. Paul, 884 N.W.2d at 361). Statutory city lacked authority to impose major roadway assessment as a condition for subdivision approval. 9 Id. See id.; Hendricks v. City of Minneapolis, 207 Minn. 151, 155, 290 N.W. 428, 430 (1940). 10 884 N.W.2d at 365. 11 Like Minneapolis, St. Paul is a home rule charter municipality. 12 Id.
Page
4
ordinances - impose solid waste fees,13 dry cleaner fees,14 electronic device fees,15 cigarette fees in lieu of settlement,16 and authorizes municipalities to impose retail liquor license fees.17 The precedent that this municipal bag fee would establish is profound: if a city can impose a bag fee, it could also impose a sugar fee, a french fry fee, a corn-based sweetener fee, a clothing made from synthetics fee, and so on. Given that the state has not conferred general sales or income taxing authority on to municipalities, such proposals supersede the authority conferred on local governments by the state. As a matter of policy, a per bag fee is an extremely regressive tax. Those citizens least able to afford additional costs are unable to avoid this flat fee. To illustrate this, imagine a young low-income parent taking a bus home from work in a summer downpour, picking children up from childcare, and then stopping to buy groceries for dinner at a corner store. This parent, despite their income, would have to pay this charge per bag just to get home with groceries intact. Contrast this with a wealthy person driving their car home from work on the same day, stopping to get gas in their car and buying a few items at the gas station, taking no notice of the per bag fee, and certainly not changing their behavior. Many people are between these two extreme examples, and will likely notice the fee and change their shopping behavior to avoid such additional charges - some might start carrying reusable bags wherever they go, but others will change their buying behavior, moving to other stores outside the city's boundaries to avoid the charges.
CONCLUSION A municipality must seek state legislative approval before mandating that business owners collect a fee on bags.
