We often focus on whether a levy is a tax masquerading as a fee because a state tax must be fairly apportioned under United States Constitutional precedent, while a fee is not so limited. Some “fees” can be quite material in amount, so it is important to have a second route of attack: challenge the levy as an improperly enacted tax. After improper enactment, the City of East Lansing (the “City”) lost badly to such a challenge. Heos v. City of East Lansing, Docket No. 165763 (Mich. Feb. 3, 2025).

The City of East Lansing realized that its budgeting was resulting in the City’s underfunding of its pension and other post-employment benefits obligations. To fill the gap, the City determined to charge a franchise “fee” for providers of electricity services and passed an ordinance to enact the levy – the levy was never voted on by City voters.

The franchise “fee” levy was negotiated into the franchise agreement for one of the City’s two electricity providers (the second provider refused to participate). The franchise agreement included a levy of 5% of revenue and was to be collected and remitted by the electricity system provider and placed on the bills of customers who receive and pay the energy bills. The provider was not liable for the levy itself, only for collecting and remitting it to the City. 

Prior to the above-mentioned creative budgeting ordinance by the City, the “Headlee Amendment” to the Michigan Constitution was enacted. The Amendment prohibits units of local government: 

from levying any tax not authorized by law or charter when [the Headlee Amendment was] ratified or from increasing the rate of an existing tax above that rate authorized by law or charter when [the Headlee Amendment was] ratified, without the approval of a majority of the qualified electors of that unit of Local Government voting thereon. Const 1963, art 9, § 31 (emphasis added).

As the Michigan Supreme Court aptly framed the issue: “Although the levying of a new tax without voter approval violates the Headlee Amendment, a charge that constitutes a user fee does not.” The Court observed with broadbrush that: “Generally a ‘fee’ is ‘exchanged for a service rendered or a benefit conferred, and some reasonable relationship exists between the amount of the fee and the value of the service or benefit.’ . . . A ‘tax,’ on the other hand, is designed to raise revenue.” This is as useful a distillation as the author has seen by a high court over the past nearly thirty years. 

The Court explained with particularity that for a levy to be considered a fee, the levy must: (1) “have a regulatory purpose and not a general revenue-raising purpose[;]” (2) “be proportionate to the required costs of the service[;]” and (3) “be voluntary.”

A majority of justices found that (1) the City stated publicly that the fee had a revenue raising purpose to fill a budget gap and funds collected and remitted by the electricity service provider went into the general revenue fund to be used for any City purpose, (2) the fee was not “proportional to the costs the City incurred for granting [the electricity service provider] the right to provide electrical services to plaintiff[,]” and (3) the fee was not voluntary because, if the plaintiff did not pay the electric bill that contained the fee, the electric service was subject to being turned off. Applying those findings, the Court concluded that the levy was indeed a tax. Further, inasmuch as the City’s voters had never had the opportunity to vote on the levy, the levy failed as a tax on which a proper vote had not been conducted. 

On a secondary issue, whether plaintiff electricity user was a taxpayer eligible to bring suit, a majority of justices answered in the affirmative. However, one justice wrote in dissent to conclude that the plaintiff was not a taxpayer (two justices did not participate in the decision). 

The takeaway here is that if you are faced with a levy, ask what the levy is accomplishing and determine whether the levy is susceptible to challenge either as an unapportioned tax or, as in Heos, an improperly enacted tax.