State appeals court rules Santa Barbara's 'franchise fee' is a tax

By Melanie Brisbon

Daily Journal Staff Writer

Santa Barbara's 1 percent surcharge on residents' electricity bills is an "illegal tax masquerading as a franchise fee," a three-judge panel of the 2nd District Court of Appeal held Thursday, reversing a trial judge.

The court cited Proposition 218, which prohibits local governments from imposing new or increased taxes without voter consent, and remanded the case to Santa Barbara County Superior Court.

"Hopefully [this decision] means that cities and counties and all taxing local agencies will start following the law a little more closely so that this doesn't happen to them," said Paul E. Heidenreich, name partner at Huskinson, Brown & Heidenreich LLP, who is representing the appellants. "For purposes of these taxpayers, hopefully it will mean that they get a refund."

Heidenreich estimated the city of Santa Barbara collected "somewhere between $6 million and $8 million in illegal taxes" that may have to be reimbursed to both residents and businesses.

The dispute stems from a 1999 franchise agreement between Southern California Edison, or SCE, and Santa Barbara. While renegotiating the contract, the city proposed increasing its required franchise fee from 1 percent to 2 percent.

SCE started billing and collecting the surcharge from Santa Barbara's electricity users in 2005, though the agreement was entered years earlier. Revenues from the surcharges were remitted to the city, according to court documents, and all electricity users including individuals and businesses were subject to the surcharge.

The plaintiffs, an individual and a business, filed suit in late 2011 claiming the surcharge was a tax, according to court documents. Jacks v. City of Santa Barbara, B253474 (Cal. App. 2nd Dist., Feb. 26, 2015).

"They asked the trial court to determine that what the city was calling a franchise fee was actually a tax and asked that they be allowed to represent all class members who are the businesses and people who pay the tax," Heidenreich said.

"Usually a trial court will determine who all the plaintiffs are and if it is a class action or not, but in this case the judge decided to do it the other way around."

Santa Barbara County Superior Court Judge Thomas P. Anderle ruled in favor of the city, saying the 1 percent surcharge was part of the franchise fee and did not qualify as a tax under Proposition 218.

Anderle also noted that the surcharge does constitute a tax under the 2010 amendments to article XIII C of the California Constitution under Proposition 26, according to court documents.

But Justice Steven Z. Perren disagreed.

"In short, the 1% surcharge bears all the hallmarks of a utility user tax," Perren wrote in his published decision.

"More importantly, its primary purpose is for the City to raise revenue from electricity users for general spending purposes rather than for [Southern California Edison] to obtain the right of way to provide electricity. This constitutes a tax under Proposition 218 and is subject to approval by the electorate."

Justices Arthur Gilbert and Kenneth R. Yegan concurred.

"The next step would be filing the motion for class certification," Heidenreich said, estimating that a class could include more than 20,000 individuals and businesses.

Santa Barbara City Attorney Ariel P. Calonne could not be reached for comment on Thursday. Rick W. Jarvis of Jarvis Fay Doporto & Gibson LLP represented the city in the appellate proceedings.

"The city is evaluating the decision," Jarvis said, declining to comment further on Santa Barbara's next steps. He added that the recent decision could have an impact on cities that charge similar taxes.

"The decision has the potential to affect primarily charter cities who want to negotiate franchise fees higher than one percent," Jarvis said.

The League of California Cities appeared as a friend of the court for defendant Santa Barbara. A spokesperson for the League of Cities was unvailable for comment.

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