Sewer Banking Charges Found to Constitute an Unlawful Tax - Court Orders Return of “Fees” to Developers
Beveridge & Diamond, P.C. - Massachusetts Environmental, Land Use & Real Estate Alert, 2009
A Massachusetts Superior Court judge has ruled that the an Inflow and Infiltration Reduction Contribution (“I/I Contribution”) imposed by the Town of Saugus (the “Town”) on new development as part of its Sewer Banking program constituted an unlawful tax. In Denver Street LLC v. Town of Saugus, Civil Action No. 2005-1938-A (Mass. Super. Ct., March 16, 2009) and three consolidated cases, the Court ruled that four developers were entitled to refunds of I/I Contributions of up to $244,200 where the “fee” imposed required new users of the sewer system to pay the Town at a rate 10 times an individual project’s need, therefore generating revenue for the Town to address its preexisting sewer system deficiencies.
In 2005, the Town entered into an Administrative Consent Order (“ACO”) with the Department of Environmental Protection (“DEP”) to address sanitary sewer overflow events that occurred during wet weather and caused overflow of sewage into residences and environmentally sensitive areas. The Town agreed to take certain actions to address the sewer overflow events, including the implementation of a “Sewer Bank.” Under the ACO, the Town could add one gallon of flow to the Sewer Bank for every 10 gallons of infiltration and inflow (“I/I”) removed from the sanitary sewer system. Infiltration is groundwater that leaks into a sewer system through defective pipes, pipe joints, and sewer connections. In-flow is extraneous water that enters a sewer system from public sources such as manhole covers and private sources such as roof drains and sump pumps.
The Sewer Bank operated by requiring sewer connection applicants to “purchase” gallows of flow from the Sewer Bank by making an I/I Contribution in order to discharge new flow to the sanitary sewer system. The I/I Contribution was imposed by the Town and not required by DEP. The ACO merely stated that no new connections would be allowed unless sufficient gallons in the Sewer Bank existed.
At the time plaintiffs applied for a sewer connection permit, the I/I Contribution was the number of gallons of proposed new flow multiplied by a factor of 10, then multiplied $3.00. The $3.00 fee was the estimated cost to repair leaks sufficient to remove one gallon of I/I from the system. As applied to a multi-family project containing 74 bedrooms, an I/I Contribution of $244,200 was imposed. The I/I Contribution was in addition to other fees including a building permit fee of $104,964 and plumbing fixture fee of $34,000. At the time the developer paid the $244,200 fee, there were sufficient gallons of credit in the Sewer Bank to allow for that connection under the ACO.
The developers challenged the I/I Contribution as an impermissible tax. A local government can only collected a tax if it is legislatively authorized. A “fee” requires no such authorization. Therefore, the Town argued the I/I Contribution was a permissible fee and not an unauthorized tax.
The distinction between a tax and a fee is based on three factors: (1) whether the fees charged are in exchange for a particular governmental service which benefits the party paying the fee, (2) the fees are paid by choice and are therefore voluntary and not tax-like, and (3) if the charges are collected to compensate the governmental entity providing services for its expenses and not as a means of raising revenues. Emerson College v. City of Boston, 391 Mass. 415 (1984).
While the Town argued the “particularized service” provided by the fee was the ability to build new developments in Saugus, the Court found the true “service” was the Town’s generation and banking of credited gallons in the Sewer Bank.
The Court noted there was no relationship between the amount of the calculated I/I Contribution and the costs to the Town to make the physical connection to the sewer system. The actual cost of a sewer connection was paid by the property owner through a separate fee. In addition, the Town had a “Sewer Enterprise Fund,” funded through payments by sewer uses generally. While I/I Contributions were deposited in a separate account, the Town had transferred funds from the I/I fund to the Sewer Enterprise Fund for general repairs, for example, for the repair of a sewer line on Route 1 and Main Street or repairs to a pumping station, which was unrelated to the proposed projects. The Court found such repairs using I/I funds did not provide any “particularized” benefits to new ratepayers.
The Court also noted the Town’s sewer system was capable of serving all of its users and new users if there was no introduction of I/I into the pipes, or if I/I was eliminated. Because under the ACO the Town was obligated to reduce I/I whether new users were added to the system or not, the Court found the I/I and sewer overflow problems existed independently of new users.
The Court was particularly troubled by the 10:1 ratio utilized by the Town in calculating the fee. While the Court posited that requiring new users of an antiquated system to pay gallon for gallon for the creation of credits for the new flow which their new developments required could be seen as reasonable, obligating those new users to pay for that gallonage multiplied by a factor of 10 overcompensated the Town.
Based on the fact that the contribution was made not in favor of any “particularized benefit” and that the developers were required to compensate the Town at a rate 10 times their own need, generating revenue for the Town to address its existing I/I problem, the Court ruled the I/I Contribution was an illegal tax and ordered its return to the plaintiffs.
For further information, contact Brian C. Levey at blevey@bdlaw.com or Krista L. Hawley at khawley@bdlaw.com.
