December 18, 1997
I have not forgotten you with respect to the question of whether the city can refund $20,000 in sewer and water capacity fees paid by a certain developer, who decided not to develop the property for which he paid the fees. I am simply very much behind in my work.
Your position is that the payment of the $20,000 represented payment of a tax, which must be paid under protest as a condition to a refund. However, I suspect the $20,000 represents a fee not a tax, and that its disposition in light of the developer's cancellation of the project depends upon contract principles.
I have been unable to determine under what authority the city's water and sewer system is operated. They can be operated under several statutes, including the city's charter. However, it is a general principle that municipal utility systems in Tennessee are operated in a proprietary, rather than a governmental, capacity. [Batson v. Pleasant View Utility District, 592 S.W.2d 578 (Tenn. Ct. App. 1979).] A government generally imposes taxes in its governmental capacity.
There is nothing in the statutes governing municipal utility systems that indicates that water and sewer capacity fees are taxes. Tennessee Code Annotated, section 7-35-414(b), does provides that:
If any municipality in Tennessee adopts a sewer fee ordinance which includes a minimum base rate charge payable by all sewer users, it is declared the public policy of the state that such minimum base rate charge shall be considered to be a local tax upon sewer users in the same manner that local property taxes are so considered. However, user fees paid in excess of the minimum base rate charge which are related to the volume or strength of sewage discharged shall be considered as user fees in the same manner in which electrical, gas, or water consumption is related to actual use. [Emphasis is mine.]
I doubt that it is the intent of this section that sewer capacity fees are taxes. In fact, under your Municipal Code, Section 18-401, governing sewer extensions, including sewer capacity charges, the sewer capacity charge is not payable by all sewer users. In addition, under Section 18-401(4)(b), the sewer capacity charge under that provision is related to volume. The same thing is true with respect to water capacity fees under your Municipal Code, Section 18-206. Finally, both Sections 18-401 and 18-206 characterize sewer and water capacity charges as "fees" rather than taxes. In other words, the city's water and sewer capacity fees under Tennessee Code Annotated, section 7-35-414, and under the city's own municipal code, are probably treated as taxes.
It is not clear in Tennessee whether cities can keep the proceeds of utility overbillings voluntarily paid by the utility customer. The courts in other jurisdictions are split on that question. However, all the cases on that question involve fees and charges for the actual use of utility services. I doubt they can be stretched to include utility fees and charges related to capacity, main extensions, etc., in cases where a developer did not go forward with a project and in which the utility provider did not suffer any monetary loss. [See B & B Amusement Enterprises, Inc. v. City of Boston, 8 N.E.2d 799 (1937), Oliver v. Iowa Power & Light Company, 183 N.E.2d 867 (1971), Texas Power & Light Company v. Doering Hotel Company, 147 S.W.2d 897 (1941), Theatere Control Corporation v. City of Detroit, 121 N.W.2d 828 (1963), National Enameling & Stamping Co. v. City of St. Louis, 40 S.W.2d 593 (1931), Garber v. City of New York, 8 N.Y.S.2d 110 (1939).]
Let me know if I can help you further in this or any other matter.
Sidney D. Hemsley
Senior Law Consultant