By Ben Solis
Gongwer News Service
The parties in a Headlee Amendment dispute over the city of East Lansing and the Lansing Board of Water and Light’s agreement to collect and pay a franchise fee presented their arguments before Michigan Supreme Court on Wednesday.
The case, Heos v. City of East Lansing (MSC Docket No. 165763), involves a plaintiff who initially argued that fee was an impermissible tax imposed in violation of the Headlee Amendment and the Foote Act.
It was one of the first cases heard by the high court bench in its opening call of the 2024-25 term.
The trial court granted partial summary disposition to the plaintiff when the city argued the complaint was time barred by the statute of limitations.
The Court of Appeals reversed that decision and held the complaint was time barred. The high court was asked to determine whether the criteria for determining when a pass-through fee imposed by a local government on a business or utility should be considered a tax paid by a customer; and whether, in the context of a utility rate, a utility customer may challenge an improper pass-through fee as an improper rate in an action against the utility, among several other questions.
Greg Hanley, attorney for the BWL ratepayer James Heos, said Headlee often forces local governments to make a simple but difficult choice in asking for more revenues in the form of taxation. Sometimes, Hanley said, municipalities have an incentive to evade the constitutional limitations created by Headlee by characterizing disguised taxes as fees, permits or licenses.
“The Headlee limitations are intended … to prevent that kind of cheating, and this city has been found by the circuit court to have cheated by creating a very creative method of municipal finance that involved deputizing a utility that provides an essential service to collect and remit a franchise fee,” Hanley said. “A so-called franchise fee that the city admits it could not impose directly.”
Hanley argued that the Court of Appeals did not “disturb the finding” of the lower court that the move violated Headlee, but rather dismissed the case on statute of limitations ground.
He posited that the case was really about standing because it turns on the who the taxpayer was in the situation.
Laura Genovich, representing the city of East Lansing, said the city disputes that this is a tax, at all, but that the taxpayer was the entity ultimately legally liable for the charge, and here, that was the Board of Water and Light.
“There is a contract memorialized in an ordinance that requires the Board of Water and Light to pay the franchise fee to the city based on its gross revenues. There is nothing in the ordinance that creates any legal obligation on the part of the plaintiff or any other customer directly to the city,” Genovich said. “The city cannot sue the plaintiff or the other customers if they don’t pay. The city cannot place a lien on their property. The city cannot turn off their electric service. The city does not provide electricity to the customers.
The city cannot direct the Board of water and light to turn off their electricity. There is no recourse that the city has against plaintiff or the Board of Water and Light customers.”
Justice Richard Bernstein asked Hanley to define taxpayer and what role they have in the scenario created by the franchise fee, to which the attorney said the question turns on taxpayer standing, which is granted to any member of the public via Headlee regardless of whether they are paying the fee at issue.
“But when we talk about the taxpayer in this context, we’re talking about who bears the legal incidence of the charge. If you bear the legal incidence of it, you are the payer of it, and you have standing on the basis of your payment of the actual tax,” Hanley said. “The notion that the statute starts running when the resolution or the ordinance is enacted falls away because you have been subject to and paid the tax.”
Hanley said the Court of Appeals decision consequently authorized taxation by contract, which he argued was clear violation of Headlee.
“Who is the taxpayer? If it’s the end user who’s legally responsible to pay this, then the statute of limitations analysis conducted by the Court of Appeals has to be vacated,” Hanley said. “I would suggest to you that the answer lies in the four corners of the franchise agreement that ultimately became an ordinance of the city, binding on everybody.”
Justice Elizabeth Welch asked Hanley if the controversy could have been allayed by drafting the ordinance differently. Hanley said they would have had to choose completely different words. Welch pressed on, asking why the case wasn’t analogous to another dealing with the same issue – one the bench could rely upon to solve the issue.
Hanley said the case Welch was referring to involved a federal statute under the Cable Television Consumer Protection and Competition Act, which expressly authorized a franchise fee, but made clear the fee was imposed on the cable utility and the utility was allowed to pass it through.
“That’s why the provisions of the (BWL) franchise agreement, which became force of law through an ordinance, has many other provisions which make clear that this is not the BWL’s responsibility,” Hanley said. “Why was there a need for a franchise fee agreement to include a provision requiring the city to, at all times, keep and save the BWL harmless from and against all lost cost, expense and claims associated with the collection of this franchise fee? Why is the BWL precluded from remitting the fees if they’re precluded from collecting said franchise fees from its customers in the city? That’s a provision, too.”
Justice Brian Zahra wondered if the case Welch referred to did a supremacy analysis, to which Hanley said no.
“It was that the federal statute made clear who bore the legal incidence,” Hanley said.
Zahra wondered if that’s also what the bench was really seeing here in the case.
“Morgan says that the fee went to the company, where here, the company is just a conduit to give the money back to the city,” Zahra said. “(Michigan law recognizes that when) it goes back to the city, it becomes a tax, and now Headlee is involved.”
Hanley said that was his client’s view of the matter.
Justice Megan Cavanagh asked Genovich if the problem was an appearance from the language of the agreement that the city doesn’t have any recourse against BWL, either.
“There’s no obligation to remit the fees if they don’t collect them from the citizens of East Lansing. They’re precluded from collecting this fee. The city can’t get it from Board of Water and Light, if they can’t get it from them, and they have to hold them harmless,” Cavanagh said. “So, while I get your argument that the city can’t go against the utility users, it doesn’t look like the city can go against BWL either?”
Genovich said she respectfully disagreed.
“There’s a couple of options. The city could take away the exclusivity provision that brother counsel was just referencing, but it also could terminate the franchise agreement, regardless of the Foote Act arguments, which are kind of a separate issue,” Genovich said.
“The plaintiff doesn’t have standing to bring a Foote Act claim and the parties, Board of Water and Light, certainly, can voluntarily enter into a franchise agreement. The Foote Act would deal with whether that can be forced upon them.”
Setting that aside, Genovich said the agreement is still revocable, so there would be a consequence.
Cavanagh said there was a consequence, yes, but they can’t collect the franchise fee if the BWL doesn’t give it to them.
Genovich argued the distinction was between BW: simply not giving it to them versus the BWL being precluded from collecting it.
“The city of East Lansing would have a breach of contract action against the Board of Water and Light, despite the way brother council has kind of narrated. It’s not a matter of, well, if one taxpayer doesn’t collect it, then it doesn’t get turned over,” Genovich said. “The language is more that if the Board of Water and Light is precluded from collecting it … the plaintiffs can bring an action against the Board of Water and Light if they believe that 5 percent charge on their bill does not relate to the service they are provided; if it’s disproportionate or not reasonable or otherwise unlawful, then the plaintiff and other Board of Water and Light customers can sue … there’s simply nothing stopping that.”
Gongwer News Service
The parties in a Headlee Amendment dispute over the city of East Lansing and the Lansing Board of Water and Light’s agreement to collect and pay a franchise fee presented their arguments before Michigan Supreme Court on Wednesday.
The case, Heos v. City of East Lansing (MSC Docket No. 165763), involves a plaintiff who initially argued that fee was an impermissible tax imposed in violation of the Headlee Amendment and the Foote Act.
It was one of the first cases heard by the high court bench in its opening call of the 2024-25 term.
The trial court granted partial summary disposition to the plaintiff when the city argued the complaint was time barred by the statute of limitations.
The Court of Appeals reversed that decision and held the complaint was time barred. The high court was asked to determine whether the criteria for determining when a pass-through fee imposed by a local government on a business or utility should be considered a tax paid by a customer; and whether, in the context of a utility rate, a utility customer may challenge an improper pass-through fee as an improper rate in an action against the utility, among several other questions.
Greg Hanley, attorney for the BWL ratepayer James Heos, said Headlee often forces local governments to make a simple but difficult choice in asking for more revenues in the form of taxation. Sometimes, Hanley said, municipalities have an incentive to evade the constitutional limitations created by Headlee by characterizing disguised taxes as fees, permits or licenses.
“The Headlee limitations are intended … to prevent that kind of cheating, and this city has been found by the circuit court to have cheated by creating a very creative method of municipal finance that involved deputizing a utility that provides an essential service to collect and remit a franchise fee,” Hanley said. “A so-called franchise fee that the city admits it could not impose directly.”
Hanley argued that the Court of Appeals did not “disturb the finding” of the lower court that the move violated Headlee, but rather dismissed the case on statute of limitations ground.
He posited that the case was really about standing because it turns on the who the taxpayer was in the situation.
Laura Genovich, representing the city of East Lansing, said the city disputes that this is a tax, at all, but that the taxpayer was the entity ultimately legally liable for the charge, and here, that was the Board of Water and Light.
“There is a contract memorialized in an ordinance that requires the Board of Water and Light to pay the franchise fee to the city based on its gross revenues. There is nothing in the ordinance that creates any legal obligation on the part of the plaintiff or any other customer directly to the city,” Genovich said. “The city cannot sue the plaintiff or the other customers if they don’t pay. The city cannot place a lien on their property. The city cannot turn off their electric service. The city does not provide electricity to the customers.
The city cannot direct the Board of water and light to turn off their electricity. There is no recourse that the city has against plaintiff or the Board of Water and Light customers.”
Justice Richard Bernstein asked Hanley to define taxpayer and what role they have in the scenario created by the franchise fee, to which the attorney said the question turns on taxpayer standing, which is granted to any member of the public via Headlee regardless of whether they are paying the fee at issue.
“But when we talk about the taxpayer in this context, we’re talking about who bears the legal incidence of the charge. If you bear the legal incidence of it, you are the payer of it, and you have standing on the basis of your payment of the actual tax,” Hanley said. “The notion that the statute starts running when the resolution or the ordinance is enacted falls away because you have been subject to and paid the tax.”
Hanley said the Court of Appeals decision consequently authorized taxation by contract, which he argued was clear violation of Headlee.
“Who is the taxpayer? If it’s the end user who’s legally responsible to pay this, then the statute of limitations analysis conducted by the Court of Appeals has to be vacated,” Hanley said. “I would suggest to you that the answer lies in the four corners of the franchise agreement that ultimately became an ordinance of the city, binding on everybody.”
Justice Elizabeth Welch asked Hanley if the controversy could have been allayed by drafting the ordinance differently. Hanley said they would have had to choose completely different words. Welch pressed on, asking why the case wasn’t analogous to another dealing with the same issue – one the bench could rely upon to solve the issue.
Hanley said the case Welch was referring to involved a federal statute under the Cable Television Consumer Protection and Competition Act, which expressly authorized a franchise fee, but made clear the fee was imposed on the cable utility and the utility was allowed to pass it through.
“That’s why the provisions of the (BWL) franchise agreement, which became force of law through an ordinance, has many other provisions which make clear that this is not the BWL’s responsibility,” Hanley said. “Why was there a need for a franchise fee agreement to include a provision requiring the city to, at all times, keep and save the BWL harmless from and against all lost cost, expense and claims associated with the collection of this franchise fee? Why is the BWL precluded from remitting the fees if they’re precluded from collecting said franchise fees from its customers in the city? That’s a provision, too.”
Justice Brian Zahra wondered if the case Welch referred to did a supremacy analysis, to which Hanley said no.
“It was that the federal statute made clear who bore the legal incidence,” Hanley said.
Zahra wondered if that’s also what the bench was really seeing here in the case.
“Morgan says that the fee went to the company, where here, the company is just a conduit to give the money back to the city,” Zahra said. “(Michigan law recognizes that when) it goes back to the city, it becomes a tax, and now Headlee is involved.”
Hanley said that was his client’s view of the matter.
Justice Megan Cavanagh asked Genovich if the problem was an appearance from the language of the agreement that the city doesn’t have any recourse against BWL, either.
“There’s no obligation to remit the fees if they don’t collect them from the citizens of East Lansing. They’re precluded from collecting this fee. The city can’t get it from Board of Water and Light, if they can’t get it from them, and they have to hold them harmless,” Cavanagh said. “So, while I get your argument that the city can’t go against the utility users, it doesn’t look like the city can go against BWL either?”
Genovich said she respectfully disagreed.
“There’s a couple of options. The city could take away the exclusivity provision that brother counsel was just referencing, but it also could terminate the franchise agreement, regardless of the Foote Act arguments, which are kind of a separate issue,” Genovich said.
“The plaintiff doesn’t have standing to bring a Foote Act claim and the parties, Board of Water and Light, certainly, can voluntarily enter into a franchise agreement. The Foote Act would deal with whether that can be forced upon them.”
Setting that aside, Genovich said the agreement is still revocable, so there would be a consequence.
Cavanagh said there was a consequence, yes, but they can’t collect the franchise fee if the BWL doesn’t give it to them.
Genovich argued the distinction was between BW: simply not giving it to them versus the BWL being precluded from collecting it.
“The city of East Lansing would have a breach of contract action against the Board of Water and Light, despite the way brother council has kind of narrated. It’s not a matter of, well, if one taxpayer doesn’t collect it, then it doesn’t get turned over,” Genovich said. “The language is more that if the Board of Water and Light is precluded from collecting it … the plaintiffs can bring an action against the Board of Water and Light if they believe that 5 percent charge on their bill does not relate to the service they are provided; if it’s disproportionate or not reasonable or otherwise unlawful, then the plaintiff and other Board of Water and Light customers can sue … there’s simply nothing stopping that.”
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