Judge Says Billings ‘Franchise Fee’ Illegal Sales Tax

A protracted battle that affects nearly all residents living in Montana’s largest city could end up costing the City of Billings between $ 6 million and $ 8 million, as a judge ruled that the “franchise fees” charged to users of the system he water and sewage were illegal sales taxes, prohibited by state law. , reports the Daily Montanan.

In addition, the court order showed that city officials had known about this dubious practice for years and sometimes feared prosecution, but still chose to collect the 4-5% fee charged. for residential connections until the lawsuit is filed in 2018.

The court case remains a class action lawsuit for many residents, and a second class of residents, which includes any residential development established since 1992, can be added. Although the case has not been tried, the summary judgment decision likely opens the city to reimbursement of some of the money.

Judge Michael Salvagni ruled that the city was charging franchise fees – the payments, according to Billings, were used to offset the indirect costs of providing municipal water and sewer services – even though Montana is full of examples of the Supreme Court quashing such charges. In his ruling, Salvagni said Billings had come up with a program where it got paid for public right-of-way, which municipalities can do for residential utility providers, like Montana Dakota Utilities or NorthWestern Energy. However, Billings’ implementation was different, Salvagni said, because it already had the right-of-way, unlike a utility company. Franchise fees may still be legal under this definition, but the city instead charged the fees while not reinvesting that money in water or sewer services.

“The ‘franchise fee’ had no relation to the cost of providing water, wastewater or solid waste disposal to customers in the city,” Salvagni wrote. “In addition, there was no franchise agreement between the city and the public works department. The main purpose of “franchise fees” was to generate income. “

Instead, the City of Billings has charged 4% or 5% arbitrarily since the fees were implemented in 1992, and they were transferred to the city’s general fund, where they were used to support other services. , like the police or the fire department.

Court records also show that city employees and officials have been concerned about the legality of franchise rights for years. In fact, Public Works Finance Director Jennifer Duray alerted then city administrator Tina Volek in 2017 that a client was insisting the fees were illegal and had threatened to call in. a lawyer.

“This is exactly what we feared,” Volek told Duray, according to court records.

The court also said that former city councilor Dan Farmer opposed the franchise fee, calling it a “very regressive sales tax” because “it hurt the little guy on fixed income and people. elderly “.

Farmer also felt that it was “fundamentally dishonest to circumvent (the city’s) Charter,” according to court documents.

Public Works Director Dave Mumford also said he repeatedly told city administration the charges were problematic, starting in 2004. He told the court he had a very specific conversation with Volek in January 2016.

“I have spoken with legal staff in the past about my concern over the state Supreme Court’s ruling that franchise fees are a tax as it is currently implemented,” Mumford said via court documents. “The court decision makes it clear that there has to be a connection between how the fees are used and what you are being assessed for. Evaluating the fees charged to clients for the use of (rights of way) and using the income for general fund obligations would not appear to be in accordance with the court ruling. “

The court case also noted that residents of Billings had no choice of services – city law requires residences within city limits to be connected to services.

“In this case, the city forced taxpayers to deal with it by using its sovereign authority to monopolize water, sanitation and solid waste disposal services by the city,” the court ruling said.

The judge also ruled that it appeared that the franchise fee was created when the city needed money and was not linked to any documented costs of running the public works department.

“The city’s claim that it used ‘franchise fees’ to cover ‘unallocated’ or ‘indirect’ costs is not supported by any evidence on the record. In addition, the city’s claim is categorically contradicted by its own confessions and testimony from its own city officials, ”the court said. “The city needed income and the property tax was not an alternative available to it.”

The court also criticized Volek for making an argument to justify the costs without any support.

“His conclusive opinion that ‘franchise fees’ should be qualified as ‘cost of service’ is simply a remark on form rather than substance which has no weight in a tax case,” Salvagni wrote.

Salvagni also ruled on several other motions that had stalled the case as she rebounded from judge to judge for nearly three and a half years (eight Yellowstone County judges recused themselves as all were residents of Billings and could possibly benefit from a settlement). One of those motions on a due process request will likely determine the extent of the city’s liability if the court ultimately rules in favor of the class action.

Salvagni has dismissed multiple counts while keeping the claims in good standing, which could mean the City of Billings would be forced to pay up to three years of franchise fees. While neither party calculated the exact amount that would be owed, an earlier report estimated franchise fees between $ 2 million and $ 2.5 million per year.

City attorneys have not responded to requests for comment on the decisions, and the case has yet to go through several other class-action stages before trial. These steps include residents who may be eligible for reimbursement of franchise fees if the court ultimately sides with residents.

A group of Billings residents have been addressing the issue of franchise fees for years, at one point, offering to settle with the city for $ 20,000 and pledge that they would never implement the fee again. , to which the city was reluctant.

Now, the City of Billings could be liable for attorney fees as well as franchise fees, which could total millions.

“After engaging in four years of costly and unnecessary litigation, residents will hopefully be reimbursed for the illegal sales tax billed to them by the city,” said attorney Matthew Monforton, who represents the residents.

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