This discussion, of a recent Supreme Judicial Court case discussing when a municipal fee is permitted, versus when such a fee crosses the line to become an impermissible tax, is from the Massachusetts Department of Revenue’s Division of Local Services regular email updates to municipal officials on issues of interest.
Under the SJC’s earlier Emerson College decision, it is an impermissible tax for towns to charge new users large fees to “buy into” the town’s existing municipal services, such as for sewer hook up and/or for other municipal services the town has already paid to build out (e.g. – schools, library, public safety, and the rest).
Sewer Connection Fees Upheld
James Crowley, Esq., Bureau of Municipal Finance Law
In Denver Street LLC v. Town of Saugus, 462 Mass. 651 (2012), the Supreme Judicial Court rendered an important decision on whether a charge imposed on new sewer users for access to the town’s sewer system was a lawful fee or an impermissible tax. The Supreme Judicial Court reversed the decisions of the Superior Court and the Appeals Court which found the charge to be an unlawful tax.
For many years the Town of Saugus had experienced a deteriorating sewer system. There were inflow and infiltration problems due to rain storms which caused sanitary sewer overflow. There was also contamination of the wetlands which posed a health risk. In response to the threat to residential property, the town had installed a bypass pump which discharged raw sewage into the Saugus River. The Department of Environmental Protection (DEP) investigated, and in 2005 the town entered into an administrative consent order (ACO) with DEP. The town was fined $25,000 and required to pay any fines that would be imposed for violation of the consent order. Under the terms of the consent order, the town was required to implement a strategic plan to identify and eliminate sources of inflow and infiltration. There was also a moratorium on new connections to the sewer system. Saugus then instituted a ten year, $27 million plan to overhaul the sewer system.
There was not a total bar on development in the town. Under the consent order, the town was allowed to establish a “sewer bank” whereby, as repairs were made to the sewer system, the capacity generated by those repairs would be calculated, and this amount would become available for new connections. Hence, there was a formula under the consent order to determine the ratio of gallons of inflow and infiltration that had to be reduced to permit one gallon of new flow into the system. There was a trade-off, if you will, between gallons removed from the system and gallons allowed. The town initially agreed with DEP on a ten-to-one ratio on reduction and used a $3 per gallon charge.
When the developers in the case at hand sought to build new residences, they were told to pay a connection charge to allow them access to the sewer system. The developers had to pay $670,460 under the formula to gain immediate access. Alternatively, they could wait until all repairs had been made and, at that time, connect to the sewer system. The wait could last years. Reluctantly, the developers paid the charge and filed suit in Superior Court in 2005 alleging the charge was an illegal tax. The town lost in the Superior Court and in the Appeals Court. Faced with the prospect of refunding over one million dollars (the initial $670,460 charge together with 12% interest), the town decided to appeal to the Supreme Judicial Court.
In its analysis of the Saugus charge, the Supreme Judicial Court relied on the 1984 decision of Emerson College v. City of Boston, 391 Mass. 415 (1984). In Emerson, the Supreme Judicial Court had invalidated the City of Boston’s augmented fire service fee for large buildings because the fire service fee constituted an illegal tax. In Emerson, the Supreme Judicial Court held that labeling the charge as a fee was not determinative and then established a three part test to distinguish a legitimate fee from an improper tax. The three Emerson tests are as follows:
First, a fee must be charged in exchange for a particular governmental service which benefits the party paying the fee in a manner not shared by other members of society.
Second, a fee must be voluntary. The party paying the fee must have the choice of not using the governmental service and thereby avoiding the charge.
Third, a fee is collected not to raise revenue but to compensate the governmental entity providing the services for its expenses.
The Supreme Judicial Court disagreed with the lower courts on the first test, namely, the particularized benefit test. In the Court’s view, the developers paying the charge had received a particularized benefit which was accelerated access to the sewer system. The Court emphasized the importance of the consent order and the strategic plan to repair the sewer system. Distinguishing the case at hand from an earlier Appeals Court decision which had invalidated a sewer connection fee, Berry v. Town of Danvers, 34 Mass. App. 507 (1993) which was discussed in the November 1993 issue of City & Town, the Court in the Saugus case rejected the notion that any particularized benefit received by a limited group must be weighed against any benefit to the general public. According to the Court, once it has been determined that a particularized benefit has been received, the first Emerson test has been satisfied.
The Court did not address the second Emerson test, the voluntariness test, since both parties agreed the payment was made by choice.
The Court then held that the third Emerson test had been satisfied since the amount paid by the developers was used to compensate the town for some of the money paid to repair the sewer system, and the ten-to-one gallons removed/gallons allowed ratio imposed on the developers was reasonable.
Consequently, the Town of Saugus prevailed and was allowed to keep the money received from the developers.
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