Editor's Note: Legal Line is a feature that will periodically appear in E-Line. This edition has been prepared by Elaine Menzel, a member of the NACO legal staff. Legal Line is not intended to serve as legal advice. Rather, it is published to alert readers to court decisions and legal or advisory matters important to county government. For a specific opinion on how the information contained in this article or that which will be discussed in future issues relates to your county, consult your county attorney or your personal counsel.
Supreme Court Rules on Occupation Tax Under LB 710 (2007)
In 2009, the Nebraska Supreme Court held that a property tax levy authorized by LB 701 (2007) was a property tax for a state purpose and unconstitutional, in violation of Neb. Const. art. VIII, § 1A. Garey v. Nebraska Dept. of Nat. Resources, 277 Neb. 149, 759 N.W.2d 919 (2009). LB 701 (2007), as described by its introducer, "was designed to address the water problems in the Republican River Basin" and "[p]rovide a way to guarantee that Nebraska stays in compliance with the ... Compact... with Kansas on an annual basis."
The Supreme Court was later presented with the question of whether an occupation tax authorized by LB 701 violates the same constitutional provision or, alternatively, the constitutional prohibitions of special legislation and commutation of taxes. Kiplinger v. Dept. of Natural Resources
) 282 Neb. 237, -- N.W.2d -- (2011). The district court had upheld the constitutionality of the occupation tax and the landowners that originated the action appealed the court's holding. The Supreme Court ultimately affirmed the lower court's decision.
The Kiplinger case discusses LB 701 and Garey v. Nebraska Dept. of Nat. Resources. The Garey case involved a constitutional challenge to the property tax levy authorized by LB 701. The use of the proceeds of this levy was restricted to repayment of riverflow enhancement bonds and repayment of funds disbursed by the Department of Natural Resources from the Water Contingency Cash Fund created by the legislation.
Included as defendants were the Department of Natural Resources and its director, the Republican Natural Resource Districts, the state Property Tax Administrator, and a number of county officials responsible for imposing and collecting the occupation tax in the various counties where the tax has been levied.
The Court addressed the background of the case by discussing:
· Republican River Compact which includes the states of Colorado, Kansas and Nebraska and the United States;
· LB 701 (2007) - discussed above;
· Garey v. Nebraska Dept. of Natural Resources -- the case involved a constitutional challenge to the property tax authorized by LB 701; and
· The background of the Kiplinger case that presents a constitutional challenge to the occupation tax allowed under LB 701.
Following the discussion of issues related to the background of the case, the Court addressed the potentially dispositive issue raised by the cross-appeal of whether, under the doctrine of res judicata, the action in Kiplinger is barred by the final judgment in Garey. Based upon the Court's de novo review of the question of law, and its application of the traditional notion of privity reflected by the Court's jurisprudence, the Court concluded that at least some of the landowners who brought this action were not been shown to be in privity with the plaintiffs in Garey. Therefore, the Court ultimately concluded that the judgment in Garey did not bar the action under the doctrine of res judicata.
The landowners alleged in their complaint that (1) the occupation tax was in fact a "'property tax for state purposes'" prohibited by Neb. Const. art. VIII, § 1A; (2) that the occupation tax resulted in a commutation of taxes in violation of Neb. Const. art. VIII, § 4; and (3) that § 2-3226.05 was special legislation in violation of Neb. Const. art. III, § 18, because it created two closed classes-the Republican NRDs, to which it granted the privilege of levying the occupation tax, and Nebraska irrigators outside the Republican NRDs who were exempted from the occupation tax. Additionally, they alleged that the judgment of the district court in Garey collaterally estopped the named defendants from relitigating the issue of whether LB 701 created an unconstitutional, closed class consisting of the Republican NRDs.
The Court addressed these constitutional challenges to the occupation tax authorized by LB 701, as codified at § 2-3226.05. Prior to doing so, the Court articulated the general principles governing the degree of deference which must be given to a legislative enactment alleged to be unconstitutional:
A statute is presumed to be constitutional, and all reasonable doubts are resolved in favor of its constitutionality. The burden of establishing the unconstitutionality of a statute is on the one attacking its validity. The unconstitutionality of a statute must be clearly established before it will be declared void. (Citations omitted.)
Is Occupation Tax "a property tax for state purposes" in Violation of Neb. Const. Art. VIII, § 1A?
The Court rejected the landowner's argument for two principal reasons and concluded that the occupation tax authorized by LB 701 (2007) was not a "property tax for state purposes". First, the argument does not address the fact that the occupation tax is not dependent upon the value of the land being taxed. Second, the fact that land is "classified . . . as irrigated" would seem to be a reasonable indicator that the "activity of irrigation" is actually occurring on the land. And if that were not the case, the landowner can avoid the occupation tax by certifying to the natural resources district "the nonirrigation status" of the land on a year-by-year basis.
Does a Statute Authorizing Occupation Tax Constitute Special Legislation Prohibited by Neb. Const. Art. III, § 18?
The Court commented, "[O]ur resolution of Garey did not reach the question of whether the district court erred in its analysis of the special legislation claim because we affirmed on other grounds. Accordingly, there was not a final judgment on the merits of that claim, and Garey therefore has no preclusive effect on this case under the doctrine of collateral estoppel."
Neb. Const. art. III, § 18, prohibits the Legislature from passing "local or special laws" in 21 enumerated circumstances. The Court acknowledged that the appellees' argument would have some logical appeal if it were writing on a clean jurisprudential slate; however, it was not persuaded to depart from long-established precedent applying the constitutional prohibition against special legislation to legislative classifications involving political subdivisions.
The focus of the prohibition against special legislation is the prevention of legislation which arbitrarily benefits or grants special favors to a specific class. A legislative act constitutes special legislation if (1) it creates an arbitrary and unreasonable method of classification or (2) it creates a permaŽnently closed class. (Citations omitted.)
The Court noted that the statutory authority conferred by LB 701 to issue riverflow enhancement bonds and levy an occupation tax to provide revenue for their payment cannot be fairly seen as a "special favor" bestowed upon an a natural resources district. Rather, it is an instrument to be utilized in maintaining compliance with an interstate compact, which, in Garey, the Court specifically determined to be "a state purpose." (Citations omitted.) Based on these reasons, the Court concluded that these statutes do not constitute special legislation.
Is LB 701 Occupation Tax Commutation of Taxes in Violation of Neb. Const. Art. VII, § 4?
The record indicates that compliance with the Compact implicates a variety of funding sources including but not limited to the occupation tax. The Court held that the landowners did not meet their burden of establishing that the occupation tax authorized by LB 701 violates the constitutional prohibition against commutation.
Unpublished Case Decided by Nebraska Court of Appeals
In an unpublished Nebraska Court of Appeals case, the court evaluated an appeal of a Tax Equalization and Review Commission (TERC) order regarding the greens on a golf course. Minden Country Club v. Kearney Cty. Bd. of Equal., A-10-1139 (2011).
The court affirmed TERC's decision because evidence of assessed values of other golf courses was not competent evidence of the actual value of the contested country club's greens and because the record did not show that the County Board of Equalization (Board) acted arbitrarily or unreasonably in determining the value.