CALIFORNIA FARM BUREAU FEDERATION v. STATE WATER RESOURCES CONTROL BOARD







Filed 1/31/11






IN THE SUPREME COURT OF CALIFORNIA



CALIFORNIA FARM BUREAU )
FEDERATION et al. )
)
Plaintiffs and Appellants, )
) S150518
v. )
) Ct.App. 3 C050289
STATE WATER RESOURCES )
CONTROL BOARD, )
) Sacramento County
Defendant and Respondent. ) Super. Ct. Nos. ) 03CS1776 & 04CS00473
__________________________________ )



STORY CONTINUE FROM PART I….


The scope of a regulatory fee is somewhat flexible and is related to the overall purposes of the regulatory governmental action. “ ‘A regulatory fee may be imposed under the police power when the fee constitutes an amount necessary to carry out the purposes and provisions of the regulation.’ [Citation.] ‘Such costs . . . include all those incident to the issuance of the license or permit, investigation, inspection, administration, maintenance of a system of supervision and enforcement.’ [Citation.] Regulatory fees are valid despite the absence of any perceived ‘benefit’ accruing to the fee payers. [Citation.] Legislators ‘need only apply sound judgment and consider “probabilities according to the best honest viewpoint of informed officials” in determining the amount of the regulatory fee.’ [Citation.]” (Prof. Scientists, supra, 79 Cal.App.4th at p. 945.) “Simply because a fee exceeds the reasonable cost of providing the service or regulatory activity for which it is charged does not transform it into a tax.” (Barratt American, Inc. v. City of Rancho Cucamonga (2005) 37 Cal.4th 685, 700.) A regulatory fee does not become a tax simply because the fee may be disproportionate to the service rendered to individual payors. (Brydon v. East Bay Mun. Utility Dist. (1994) 24 Cal.App.4th 178, 194.) The question of proportionality is not measured on an individual basis. Rather, it is measured collectively, considering all rate payors. (Prof. Scientists, supra, 79 Cal.App.4th at p. 948.)
Thus, permissible fees must be related to the overall cost of the governmental regulation. They need not be finely calibrated to the precise benefit each individual fee payor might derive. What a fee cannot do is exceed the reasonable cost of regulation with the generated surplus used for general revenue collection. An excessive fee that is used to generate general revenue becomes a tax.
Reference to the statutory language reveals a specific intention to avoid imposition of a tax. By its terms, section 1525 permits the imposition of fees only for the costs of the functions or activities described, and not for general revenue purposes. Section 1525, subdivision (c) carefully sets out that the fees imposed shall relate to costs linked to issuing, monitoring, enforcing and administering licenses and permits, and lists the recoverable costs in some detail. Section 1551 directs that the fees collected be deposited in the Water Rights Fund, not in the General Fund. Section 1552 describes the purposes for which the money in the Water Rights Fund may be expended.^[1] Although the fees set forth in section 1551 come from various sources, including some that do not involve the services described in section 1525,^[2] it cannot be argued that the fees are excessive just because sections 1551 and 1552 list a variety of revenues to be deposited in the Water Rights Fund.
Section 1552 does not describe how the various revenues deposited in the Water Rights Fund should be allocated. However, no statutory language precludes the segregation and application of collected fees to fund services described in that section.^[3]
Section 1525 does not require the SWRCB to collect anything more than the administrative “costs incurred” in carrying out the functions authorized in its subdivisions (a), (b) and (c). Also, section 1525, subdivision (c) directs the SWRCB to set the fee schedules so that the “total amount of fees collected . . . equals that amount necessary to recover costs incurred in connection with” the Division’s administration of the provisions of subdivisions (a) and (b). Similarly, section 1525, subdivision (d)(3) requires the SWRCB to “set the amount of total revenue collected each year through the fees authorized by this section at an amount equal to the revenue levels set forth in the annual Budget Act for this activity.” (Italics added.) Although the “activity” subject to fees under this section could represent all of the Division’s activities, the Court of Appeal correctly noted, “[T]here is nothing in the ‘total amount’ or ‘total revenue’ provisions of subdivisions (c) and (d) that requires the SWRCB to set the fees so as to collect anything more than the administrative ‘costs incurred’ in carrying out the permit functions authorized in subdivisions (a), (b) and (c).” Also, there is a safeguard in subdivision (d)(3) authorizing the SWRCB to “further adjust the annual fees” if it “determines that the revenue collected during the preceding year was greater than, or less than, the revenue levels set forth in the annual Budget Act . . . .” (§ 1525, subd. (d)(3).) Thus, the fees charged under section 1525 are linked to the activities the Division performs.
“As applied” challenge
Plaintiffs also contend section 1525 is unconstitutional as applied through the fee schedule in regulation 1066 because the fees are so disproportionate that they are unreasonable. Central to the resolution of this issue is an understanding of the extent and costs of the Division’s regulatory “activity.” (§ 1525, subd. (d)(3).) The parties diverge in their approach.
As noted, on its face the statutory scheme appears simply to permit the recovery of costs the SWRCB incurs in annual supervision of water usage and the processing of applications for new or modified rights. However, plaintiffs argue the following: (1) While the Division engages in a variety of activities that benefit all water rights holders, and the general public, it is only authorized to impose fees on 40 percent of rights holders. (2) Because the statutory scheme requires that 100 percent of the Division’s annual budget must be recovered through fees, the result is that 40 percent of rights holders are charged for the entire cost of operations that benefit all rights holders and the public at large. This disparity is brought to bear not on the face of the statutes, but in the regulations authorizing fee collection. Plaintiffs claim the regulations impose unreasonable fees because they are so disproportionate to the benefit derived by the fee payors or the burden they place on the regulatory system. (See Sinclair Paint, supra, 15 Cal.4th at p. 878.) Therefore, plaintiffs contend the fees operate as a tax and are unconstitutional because the authority for their imposition was not approved by a two-thirds vote of the Legislature.
On the other hand, the SWRCB claims that the fees are proportional and that plaintiffs’ focus on the benefits of the regulatory program is misplaced. It argues that the broad benefits of the program must be distinguished from its costs. The Board contends that it can allocate the majority of its regulatory costs to persons subject to the water rights permit and license system because its costs flow primarily from the administration of that permit and license system. It acknowledges that the benefits that result from the regulation of permits and licenses may be characterized as benefits not only to permit and license holders, but also to the general public, and other water rights holders not subject to its fee system. But, the Board argues, that does not alter the fact that its costs are largely due to its oversight and administration of the permit and license system and not the regulation of the public or other water rights holders. The Board claims that some 95 percent of its time and expense are directed toward servicing and regulating those licensees and permittees against whom the challenged fees were assessed. As we explain below, however, the trial court made no findings on this claim.
In weighing these arguments, we look to our decision in Sinclair Paint, supra, 15 Cal.4th at page 866. There, the plaintiff challenged the fee in question on the basis that the fee was not regulatory in nature, but rather was aimed at raising revenue.^[4] We acknowledged that “the term ‘special taxes’ . . . ‘ “does not embrace fees charged in connection with regulatory activities which fees do not exceed the reasonable cost of providing services necessary to the activity for which the fee is charged and which are not levied for unrelated revenue purposes.” [Citations.]’ ” (Sinclair Paint, supra, 15 Cal.4th at p. 876.) We held that the fee in question was a regulatory fee and not a tax because it was “imposed . . . to mitigate the actual or anticipated adverse effects of the fee payers’ operations.” (Id. at p. 870.) Thus, in Sinclair Paint, to determine the tax or fee issue, we directed courts to examine the costs of the regulatory activity and determine if there was a reasonable relationship between the fees assessed and the costs of the regulatory activity. (Id. at pp. 870, 878.)^[5]
Thus, the question revolves around the scope and the cost of the Division’s regulatory activity and the relationship between those costs and the fees imposed. It is further complicated by the fact that not all those who hold water rights are required to pay the fee. Unfortunately, the record before us is insufficient to resolve the “tax or fee” question. The trial court’s order lacks sufficient factual findings for us to determine whether the fees, as imposed, were reasonably proportional to the costs of the regulatory program. In fact, at the hearing on plaintiffs’ motion for a peremptory writ of mandate, the trial court stated it did not believe it was required to make detailed findings.
We have previously noted that “[i]t has long been the general rule and understanding that ‘an appeal reviews the correctness of a judgment as of the time of its rendition, upon a record of matters which were before the trial court for its consideration.’ [Citation.] This rule reflects an ‘essential distinction between the trial and the appellate court . . . that it is the province of the trial court to decide questions of fact and of the appellate court to decide questions of law. . . .’ [Citation.] The rule promotes the orderly settling of factual questions and disputes in the trial court, provides a meaningful record for review, and serves to avoid prolonged delays on appeal.” (In re Zeth S. (2003) 31 Cal.4th 396, 405.) Here, the trial court erred by failing to provide a sufficient record to rule on the question of law. Accordingly, this matter must be remanded. The trial court is directed to make detailed findings focusing on the Board’s evidentiary showing that the associated costs of the regulatory activity were reasonably related to the fees assessed on the payors. (Sinclair Paint, supra, 15 Cal.4th at p. 870.) Of course, plaintiffs are free to renew their claim that the fees assessed exceeded the reasonable cost of the Division’s services. (Id. at p. 881.)^[6]
The trial court’s findings should include whether the fees are reasonably related to the total budgeted cost of the Division’s “activity” (see § 1525, subd. (c)), keeping in mind that a government agency should be accorded some flexibility in calculating the amount and distribution of a regulatory fee. Focusing on the activity and its associated costs will allow the trial court to determine whether the assessed fees were reasonably proportional and thus not a tax. (Sinclair Paint, supra, 15 Cal.4th at p. 870.) The court must determine whether the statutory scheme and its implementing regulations provide a fair, reasonable, and substantially proportionate assessment of all costs related to the regulation of affected payors.
C. Federal Contractors
Plaintiffs Northern California Water Association and Central Valley Water Project Association contend that section 1525, subdivision (a), is unconstitutional because it improperly imposes an ad valorem tax on real property. This argument assumes that water rights are real property rights, and that the fee imposed by section 1525 is based upon the ownership of real property. Because the assumption is faulty, the argument fails.
The water rights at issue are “usufructuary” only and do not confer a right of private ownership in a watercourse.^[7] (Shirokow, supra, 26 Cal.3d at p. 307.) California’s water is owned by the people and the right to use water is prescribed by law. (§ 102.) We agree with the Court of Appeal that “[p]otentially conflicting water right claims and uses, not real property ownership, give rise to the need for regulation through the system of permits and licenses administered by the Division.” Appropriative riparian rights are incidental and appurtenant to the land upon which they are used. (Fullerton v. State Water Resources Control Bd. (1979) 90 Cal.App.3d 590, 598.) It is the right to use the water that gives rise to the fee. On its face, section 1525’s scheme is not an ad valorem tax on a real property interest.
Facial challenge
These same plaintiffs also contend that sections 1540 and 1560 are unconstitutional on their face because they violate the supremacy clause of the United States Constitution. (See McCulloch v. Maryland (1819) 17 U.S. (4 Wheat.) 316, 425-437.) Under established principles of sovereign immunity, the federal government is immune from state taxation absent its consent. (See Davis v. Michigan Dept. of Treasury (1989) 489 U.S. 803, 812-813.)
Section 1540 provides in relevant part: “If the board determines that the person or entity on whom a fee or expense is imposed will not pay the fee . . . based on the fact that the fee payer has sovereign immunity under Section 1560, the board may allocate the fee or expense, or an appropriate portion of the fee or expense, to persons or entities who have contracts for the delivery of water from the person or entity on whom the fee or expense was initially imposed. The allocation of the fee or expense to these contractors does not affect ownership of any permit, license, or other water right, and does not vest any equitable title in the contractors.”
Section 1560 states that the fees imposed under section 1525 apply to the United States and Indian tribes “to the extent authorized under federal or tribal law.” (§ 1560, subd. (a).) Also, section 1560, subdivision (b)(2) provides that the SWRCB should allocate the fees as provided in section 1540 should the United States or an Indian tribe refuse to pay them.
Thus, the plain language of section 1540 provides that if a federal or tribal obligee asserts sovereign immunity under section 1560, the SWRCB may allocate the fee, or a portion of the fee, to persons or entities that have water delivery contracts with the obligee. This practice is permitted under federal law when a private contractor’s use of United States property may be taxed.^[8] But the allocation is limited to the extent the contractor has beneficial or possessory use of the property. (See United States v. County of Fresno (1977) 429 U.S. 452, 462 (County of Fresno); United States v. Nye County Nevada (9th Cir. 1991) 938 F.2d 1040, 1042-1043 (Nye County); United States v. Hawkins County, Tennessee (6th Cir. 1988) 859 F.2d 20, 23 (Hawkins County).)^[9] We reject the contention that the statutory scheme imposes the fees on water rights of the United States and not the private contractors. Clearly, any attempt to impose fees on the federal government would be resisted on sovereign immunity grounds.
Accordingly, neither section 1540 nor section 1560 authorizes imposition of a fee that facially violates the supremacy clause or state and federal rights to equal protection and due process.
“As applied” challenge
We next address the implementing regulation. Under regulation 1073, the SWRCB assessed annual costs against the federal contractors, prorating among them the amount of annual fees associated with all the Bureau of Reclamation’s permits and licenses—over 116 million acre-feet. However, while the Bureau holds all the permits and licenses, the contractors have contractual rights for water delivery over only 6.6 million acre-feet or about 5 percent of all rights held by the Bureau. The Court of Appeal held that regulation 1073 violated the supremacy clause because it required “the federal contractors to pay for the entire amount of annual fees that would otherwise be imposed on the Bureau.”
To successfully defend a supremacy clause challenge to a tax on persons or entities that contract with the federal government, the taxing authority must segregate and tax only the beneficial or possessory interest in the property. (See County of Fresno, supra, 429 U.S. at p. 462; Nye County, supra, 938 F.2d at pp. 1042-1043; Hawkins County, supra, 859 F.2d at p. 23.) Thus, although the SWRCB has the authority to impose regulatory costs on the federal contractors, it can do so only to the extent of the contractors’ interest.
Regulation 1073’s formula required the federal contractors to pay for the entire amount of annual costs that would be imposed on the Bureau of Reclamation despite the fact that their contractual rights represented a small proportion of the whole. Plaintiffs claim that the result is a disproportionate assessment of fees, thereby making regulation 1073 unconstitutional under the supremacy clause.^[10] (County of Fresno, supra, 429 U.S. at p. 462.) They contend that the fees should be based on the amount of water they contracted to deliver.
The SWRCB counters that the imposition of the fee should not be limited to the amount of water actually deliverable under the federal contracts. The SWRCB argues that it correctly calculated the fees using the face value of the permitted and licensed water rights. The face value is the total annual amount of water diversion authorized by the federally held permit or license. The SWRCB argues that the amount of diversions authorized by the federally held permits and licenses generally exceeds the amount of the water delivery contracts. The difference between the amount available for diversion and the amount actually delivered is due to factors that include hydrological variation, the need to hold water in storage for future dry years, conveyance and evaporation losses, and water releases to mitigate for project impacts on fish and wildlife.
In addition, the SWRCB argues the following. The Bureau of Reclamation controls the CVP water under permits and licenses issued and regulated by the Water Rights Division. The water is held for two primary purposes: hydroelectric power generation and water supply. The SWRCB sought to apportion a fair share of the regulatory costs associated with these permits and licenses to those water users who benefit through their water delivery contracts with the Bureau. As a result, the SWRCB initially discounted the value of the permits and licenses by approximately 50 percent to account for hydroelectric power generation use, then allocated to the federal contractors a pro rata share of the regulatory costs to the remaining value of the Bureau’s permits and licenses that related to water supply. Accordingly, the Board argues, these charges were reasonably calculated because they apportioned the Division’s costs of administering the Bureau’s permits and licenses, exclusive of those costs related to hydroelectric generation, to the federal contractors who benefited from the receipt of the water.
The SWRCB asserts that this is a fair apportionment of costs that withstands a supremacy clause challenge. It argues the federal contractors’ beneficial interest is not properly valued by a simple calculation of the proportion of total CVP water the contractors are entitled to receive under their contracts. It claims that a fair determination of the federal contractors’ beneficial interest must include consideration of the system that supports and ensures the delivery of the amount contracted, not just the amount of water contracted for delivery. Thus, the SWRCB proposes that the federal contractors have a taxable interest in the “face value” of the Bureau’s water rights held under permits and licenses, less any amounts used for hydroelectric generation.
We agree with the SWRCB. However, again due to conflicting factual assertions and an inadequate record, we cannot determine how much of the total water in question is used to support the water delivered and can thus be allocated to the federal contractors’ beneficial interest. Accordingly, we remand for the trial court to determine the contractors’ beneficial interest and the value of that interest. The trial court shall make findings as to whether the Board has fairly evaluated the federal contractors’ beneficial interest, such that water not actually under contract for delivery is fairly attributable to the value of the delivery contracts themselves.^[11]

DISPOSITION
We affirm the Court of Appeal’s judgment holding that the fee statutes at issue are facially constitutional. However, the Court of Appeal’s judgment is reversed as to its determination that the statutes and their implementing regulations are unconstitutional as applied. We remand this matter for the Court of Appeal to remand to the trial court for proceedings consistent with this opinion.
CORRIGAN, J.

WE CONCUR:

KENNARD, Acting C. J.
BAXTER, J.
WERDEGAR, J.
CHIN, J.
MORENO, J.
GEORGE, J. *














_______________________
* Retired Chief Justice of California, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.

CONCURRING OPINION BY MORENO, J.


I concur in the majority opinion. I write separately to offer these additional reflections on the “as applied” challenge to the fee as a tax.
A charge that is labeled a regulatory fee may indeed be a tax in disguise if “the amount of fees assessed and paid exceeded the reasonable cost of providing the [regulatory] services for which the fees were charged, or [if] the fees were levied for unrelated revenue purposes.” (Sinclair Paint Co. v. State Bd. of Equalization (1997) 15 Cal.4th 866, 881.) Here, there is no allegation that the fees in question are being used for unrelated revenue purposes. Rather, it is contended that only 40 percent of water rights holders are being charged a fee that by right should be charged to all water rights holders, and therefore the fee is not sufficiently linked to the regulatory costs generated by those on whom the fee is imposed and constitutes a tax.
Every government entity that imposes a regulatory fee must decide who should be subject to the fee and who should not. A number of factors may go into that decision, including assessments of the regulatory burdens imposed by the various actors and the administrative convenience of imposing the fee. As the majority states: “ ‘Legislators “need only apply sound judgment and consider ‘probabilities according to the best honest viewpoint of informed officials’ in determining the amount of the regulatory fee.” [Citation.]’ ” (Maj. opn., ante, at p. 16.) So, too, legislators and regulators need only make reasonable decisions about who should be subject to a regulatory fee.
In the present case, the State Water Resources Control Board claims that “some 95 percent of its time and expense are directed toward servicing and regulating those licensees and permittees against whom the challenged fees were assessed.” (Maj. opn., ante, at p. 20.) The support for this contention stems primarily from a document produced by the board on April 15, 2004, shortly after the present litigation commenced. Because of the uncertain reliability of this document, as well as the trial court’s lack of findings, remand is appropriate to determine whether the board’s decisions regarding who would be subject to the fee were reasonable.
MORENO, J.
I CONCUR: WERDEGAR, J.

See last page for addresses and telephone numbers for counsel who argued in Supreme Court.

Name of Opinion California Farm Bureau Federation v. California State Water Resources Control Bd.
__________________________________________________________________________________

Unpublished Opinion
Original Appeal
Original Proceeding
Review Granted XXX 146 Cal.App.4th 1126
Rehearing Granted

__________________________________________________________________________________

Opinion No. S150518
Date Filed: January 31, 2011
__________________________________________________________________________________

Court: Superior
County: Sacramento
Judge: Raymond M. Cadei

__________________________________________________________________________________

Counsel:

Gibson, Dunn & Crutcher, David A. Battaglia, William E. Thomson, Eileen M. Ahern, Kahn A. Scolnick; Nancy N. McDonough and Carl G. Borden for Plaintiff and Appellant California Farm Bureau Federation.

Somach, Simmons & Dunn, Stuart L. Somach, Kristen T. Castaños, Robert B. Hoffman and Daniel Kelly for Plaintiffs and Appellants Northern California Water Association and Central Valley Project Water Association.

O’Laughlin & Paris, Tim O’Laughlin and William C. Paris for San Joaquin River Group Authority as Amicus Curiae on behalf of Plaintiffs and Appellants.

Jason E. Resnick for Western Growers Association, California Cattlemen’s Association and California Grape and Tree Fruit League as Amici Curiae on behalf of Plaintiffs and Appellants.

Harold Griffith as Amicus Curiae on behalf of Plaintiffs and Appellants.

Downey Brand, Kevin M. O’Brien, Jennifer L. Harder and Joseph S. Schofield for Association of California Water Agencies, Regional Council of Rural Counties and Family Water Alliance as Amicus Curiae on behalf of Plaintiffs and Appellants.

Erica Frank; Michele Pielsticker; Law Office of Anthony T. Caso and Anthony T. Caso for California Chamber of Commerce, Personal Insurance Federation of California, Association of California Insurance Companies, Wine Institute, Federation of Independent Business Legal Foundation and California Taxpayers’ Association as Amici Curiae on behalf of Plaintiffs and Appellants.

Trevor Grimm, Jonathan M. Coupal and Timothy A. Bittle for Howard Jarvis Taxpayers Association as Amicus Curiae on behalf of Plaintiffs and Appellants.

Fulbright & Jaworski, Jeffrey B. Margulies; and Heidi K. McAuliffe for National Paint & Coatings Association, Inc., as Amicus Curiae on behalf of Plaintiffs and Appellants.



Page 2 – S150518 - counsel continued

Counsel:

Bill Lockyer and Edmund G. Brown, Jr., Attorneys General, Amy J. Winn, Acting Assistant Attorney General, David S. Chaney and Paul Gifford, Assistant Attorneys General, Gordon Burns, Deputy Solicitor General, William L. Carter, Matthew J. Goldman and Molly K. Mosley, Deputy Attorneys General, for Defendant and Respondent.

David R. Owen; Rossmann and Moore, Antonio Rossman, Robert B. Moore; Hamilton Candee, Katherine S. Poole; and Joanne S. Spalding for The Planning and Conservation League, Natural Resources Defense Council and Sierra Club as Amicus Curiae on behalf of Defendant and Respondent.

Diane F. Boyer-Vine, Robert A. Pratt and Marian M. Johnson for the California Legislature as Amicus Curiae on behalf of Defendant and Respondent.








Counsel who argued in Supreme Court (not intended for publication with opinion):

Stuart L. Somach
Somach, Simmons & Dunn
813 Sixth Street, Third Floor
Sacramento, CA 95814
(916) 446-7979

Molly K. Mosley
Deputy Attorney General
1300 I Street, Suite 125
Sacramento, CA 94244-2550
(916) 445-5367






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