In a recent case in Michigan, the plaintiff brought an action against the city of Detroit, where the validity of the claims depended upon whether the fire-service charges at issue were taxes or fees.

The trial court, in deciding the case, determined that the charges were fees, and granted judgment in favor of the defendant. The plaintiffs appealed.

The appellate court pointed out that in determining whether a charge is a tax or a fee, three primary criterion are used: 1. a user fee must serve a regulatory purpose rather than a revenue-raising purpose; 2. user fees must be proportionate to the necessary costs of the service; and 3. courts must consider the expense of “choice” or “voluntariness,” which characterized fees as opposed to taxes.

The court pointed out that it was not contested that the defendant city imposes a fire-service charge to finance, maintain, and operate a fire protection program in the city that directly applies to payors of the charges and not the general public. The charges are imposed on property owners to seek and obtain occupancy permits to maintain commercial or multi-residential operations on their properties. The parties did not contest that the charge is used entirely to fund and administer the fire protection program. No excess funds were retained or used to finance other activities, services or benefits for the public or third parties, and none of the money collected from the fire-service charges is placed in the defendant’s general funds or in accounts distinct and unrelated to the fire protection program. In addition, it was undisputed that the fire protection program provides regulatory oversight and inspections only for properties that have commercial and multi-residential operations. Under the fire service program, the defendant’s fire marshal enforces and maintains adequate fire safety standards for these specific properties, including standards for specialized fire hazards on commercial properties, fire alarms, fire escapes, and escape routes, among other regulatory requirements.

The appellate court agreed with the decision of the court of appeals that the defendant’s charges met the definition of a fee and therefore granted summary disposition in favor of the city. The court pointed out that the fees were spent entirely on financing the regulatory activity directly applicable to and governing the plaintiff, an operator of commercial properties. The court pointed out that the defendant city adequately differentiated particularized benefits to property owners from the general benefits conferred on the public. The court stated that the charges at issue were proportional and reasonably calculated to approximate the costs the defendant incurs to administer the regulatory program for individual payors. Therefore, the court found that the defendant’s fire-service charges are not taxes.

The court pointed out that a fee must be proportional to the “regulatory activity” the government finances through its collections. Specifically, a fee must cover the reasonable “costs of a regulatory activity,” such as “the cost of issuing (a) license” and “the regulation of the business” paying the fee.

While the cost of operating the fire protection program and the costs imposed on the defendant in issuing and administering the occupancy permits can be recovered through reasonable and proportional fees, the plaintiff’s mere possession of a permit to occupy its lawfully owned property and operate a business in the city cannot be considered a benefit that distinguishes the instant fee from a tax.

The court held that the plaintiff operated a commercial property in the city and paid the fee for the regulatory system administered. The defendant used the money collected from the charge in its entirety to fund the cost of running the regulatory program, which oversaw and administered fire-safety standards for commercial and multi-residential permit holders in the city. The charge at issue was a reasonable and proportional fee imposed on select properties that the defendant was subjected to regulatory oversight on and was not collected for “general benefits conferred on the public.”

Therefore, the decision of the court of appeals was affirmed.