Court Determines Tax Is Impermissible

Read the full decision: Heartland Apartment Ass'n, Inc. v. City of Mission

In a case supported by NAR, Kansas’s highest court finds that town’s “transportation user fee” imposed a tax on property owners based on the use of their property and thus was an impermissible excise tax.

A city located in Kansas (“City”) enacted a “Transportation User Fee” (“TUF”) that imposed a fee on properties designated to maintain the City’s roads. The City categorized properties and estimated the number of car trips each type of property would generate, using that information to calculate the TUF for each particular property.

Two associations of building owners as well as individual property owners in the City (“Challengers”) filed a lawsuit challenging the TUF as an impermissible excise tax. The trial court ruled in favor of the City, but the appellate court reversed and found the TUF to be an impermissible excise tax. The City appealed to the state’s highest court.

The Supreme Court of Kansas affirmed the appellate court determination that the TUF was an impermissible excise tax. There were two issues for the court to consider: first, is the TUF a tax or a fee; and if the TUF is a tax, is it an ad valorem tax or a type of impermissible tax, such as an excise tax.

The state constitution grants municipalities the power to govern their own affairs, but there are certain areas where the state retained the right to govern the municipalities, one of which was the ability to prohibit certain fees or taxes imposed by the municipality. The state legislature later enacted a statute that prohibits municipalities from imposing excise taxes.

The court first considered whether the TUF constituted a tax or a fee. In general, a tax is a forced contribution by citizens to raise revenue for government services offered to the general public, while a fee is a payment for a special privilege or a service rendered. The City argued that the TUF was a fee and so was outside of judicial scrutiny. The City equated the TUF with a utility fee imposed on users of the utility. The court rejected these arguments. First, the TUF was imposed upon all property owners regardless of whether they used the roads or not, unlike the utility fees which only required users of the utility to pay the fee. Second, the TUF collected revenue to support the City’s basic services provided to the general public, even though the TUF was earmarked for the City’s road budget. Thus, the TUF constituted a tax and not a fee.

Next, the court determined that the TUF was an excise tax and so violated Kansas law. Kansas courts define an excise tax as any tax that is not an ad valorem tax. Ad valorem taxes are based on the value of the article or thing being taxed, such as a sales tax or a property tax. An excise tax is based on the performance of an act, engaging in an occupation, or the enjoyment of a privilege. Since the TUF is tax on property owners based on their use of their property rather than the value of the property, the TUF constituted an excise tax and so the City could not impose the TUF on property owners. Therefore, the court affirmed the appellate court and sent the case back to the trial court to affirm judgment in favor of the Challengers.

Heartland Apartment Ass'n, Inc. v. City of Mission, 392 P.3d 98 (Kan. 2017).

Editor’s Note: NAR and the Kansas Association of REALTORS® filed an amicus curiae brief in support of the Challengers.