Missouri Supreme Court Reaffirms User Fees are Not Taxes

Supreme Court Hancock Decision, Census Issues, & Auditor’s TDD Report

Missouri Supreme Court Reaffirms User Fees are Not Taxes – In a case in which CVR acted as counsel to the Missouri Municipal League as amicus curiae, the Missouri Supreme Court issued a unanimous decision in Arbor Investment Co. LLC v. City of Hermann, SC 91109 (May 31, 2011) affirming the City’s right to impose utility rates above actual costs and make transfers of excess utility revenue to the City’s general fund. 

The City prevailed before the trial court under the 5-part Keller test against allegations that the City’s utility charges were grossly in excess of its costs of providing services, and that transfers of portions of utility revenue to the City’s general fund was evidence that the utility charges were a hidden tax in violation of the Hancock Amendment. However, the Court of Appeals (E.D.) reversed and appeared to change the Keller test to one dispositive factor by holding that if “the object of the fees is to fund the City’s general revenue, then this constitutes a violation of Hancock…” 

However, the Supreme Court affirmed the trial court and specifically rejected the appellants’ and AG’s proposed change to the Keller test that would make the utility charges a tax when the utility is a sole provider and charges anything above cost.  The Court reaffirmed that a user fee is not subject to Hancock, noting that while a user fee can become subject to Hancock if the charge is “so excessive as to be effectively unrelated to the service being provided,” even a charge double actual cost, on its own, is not enough to convert the fee to a tax.  The Court held that a City may charge above costs to cover the overhead of delivering that service, and if the fees are unpopular, the remedy is to vote those persons setting the fees out of office. 

In the end, the decision upholds the law as understood by most cities and keeps the current user fee v. tax analysis intact – averting the widespread adverse effects on municipal budgets across the state had the Court of Appeal’s decision been allowed to remain in place.