A city's solid waste inspection fee, which is paid by owners of commercial and industrial properties served by private waste haulers, is not a tax in disguise, says a Michigan appellate court.

In 2006, the city of Detroit gave up relying on a tax levy to help fund solid waste collection, disposal and inspection operations. Instead, it enacted an ordinance that, among other provisions, hiked the rates for city-provided solid waste services and authorized fees for some programs, including inspections to "ensure proper solid waste removal services exist" at commercial and industrial properties.

Over the following months, city officials developed a table of rates for commercial solid waste inspection fees based on what was involved in inspecting businesses of various sizes and types. As part of this effort, the city budget office, upon advice of legal counsel, analyzed the direct and indirect personnel and overhead costs associated with the inspection process. For good measure, the city hired an expert to evaluate the soundness of the cost forecast.

The city council approved the fee schedule in mid-2007. Before the inspection program got underway, it was unclear if the fee would be charged to all commercial properties regardless of whether the owners contracted with the city Department of Public Works for waste removal services or with a private hauler. Ultimately, the city decided to charge the fee only to properties with private waste collection. A commercial or industrial property receiving waste collection from the city pays the service fees charged by the department, but no inspection fee.

Laurence G. Wolf owns commercial real estate served by private waste hauling firms. When he got a bill from the city for inspection fees, he paid them under protest. He then filed suit against the city, seeking a ruling that the fees were void and unenforceable because the city council acted illegally.

The Michigan Constitution forbids a municipality from levying any tax not authorized by pre-existing state law "without the approval of a majority of the qualified electors of that unit of [l]ocal [g]overnment voting thereon."

For its part, the city did not dispute that the new charges were enacted without voter approval. Rather, it contended, the fees stemmed from the traditional municipal police power to regulate public health, safety and welfare, not from an exercise of the municipality's taxing authority.

Under Michigan law, a "fee" and a "tax" are distinguishable. A fee typically involves a service rendered or a benefit conferred, whereas a tax is designed to raise revenue. Michigan courts have identified three criteria for a fee: (1) it serves a regulatory purpose; (2) it is proportionate to the costs of service or benefit; (3) it is voluntary.

Applying these standards, the Michigan Court of Appeals ruled in favor of the city, finding that the inspection fee "serves and furthers a regulatory purpose … to ensure the efficient removal of solid waste … and to protect the public health." In addition, the court was persuaded by "the City's good faith attempts to determine a reasonable fee" with the goal of "assur[ing] that the fee is reasonably proportionate to cover the … costs of … these services." Finally, the evidence showed that property owners could avoid the fee by signing up for city-provided collection and disposal services.

[Wolf v. City of Detroit, No. 279853, Mich.App., Jan. 21, 2010]

Barry Shanoff is a Rockville, Md., attorney and general counsel of the Solid Waste Association of North America.

The legal editor welcomes comments from readers. Contact Barry Shanoff via e-mail: [email protected].