Tax or fee? It’s more than just semantics

Joe Henchman Contributor
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American antipathy to taxes is rooted deeply in our nation’s history. So it’s no surprise that lawmakers seek to avoid raising taxes, or at least, seek to raise revenue in ways that avoid the “tax-hiker” label. Instead they call things “fees.” It’s more than just semantics: many states have extra procedural rules for taxes but not for fees, such as requiring multiple votes or public approval.

How can one tell between a tax and a fee? The paramount difference between a tax and a fee is the purpose of the charge. A charge that covers the cost of providing a service to the payer is a fee. A charge that raises revenue for general spending without conferring any exclusive benefit to the payer is a tax.

Take the telephone tax in Union City, Calif. The city imposed a charge on all telephone users to fund the city’s 9-1-1 emergency response system, but argued that it was a “fee.” Not so, said the California Court of Appeal, because the charge funds a system that benefits all citizens, not just those who pay the charge. It’s a tax.

Or take a case in Louisiana, where a man speeding on the Lake Pontchartrain Causeway Bridge was ordered to pay a $65 fine, $129.75 in court costs, and a $5 “Causeway Citation” to fund police officer salaries and equipment. The state argued that the charge was a fee; the Louisiana Supreme Court ruled that the expense of enforcing the laws of the state provided benefits to everyone and not just the speeder, and that the charge was a tax.

In Washington, D.C., consumers must now pay a 5-cent charge when they request plastic bags from stores that sell food. The sponsors have called it a “fee” but the revenue goes to a tangentially related environmental cleanup fund. The benefits of the revenue don’t go exclusively to those paying the charge, so it’s properly called a tax.

Sometimes I hear that the difference between a tax and a fee is that taxes are “voluntary” and fees are not. Such analysis runs into trouble because every decision to purchase a good or service is voluntary, while few taxes or fees are not required. For example, the decision to drive on a toll road or to buy a product is voluntary, but once the decision is made, the toll or sales tax must be paid. The purchase almost always is voluntary but the charge hardly ever is: under a “voluntary” framework, nothing would be a tax.

There are some exceptions, of course. My favorite museum has free admission but also has a prominent box asking for voluntary donations for admission. That, I suppose, would be a voluntary charge, in that you can use the service whether or not you pay. I might get funny looks or feel guilty, though.

So imagine my surprise when I learned that Georgia legislators have approved two bills (H.B. 1221 and S.B. 512) pushing a voluntary tax. Georgia, like all states, cannot force out-of-state companies to collect sales taxes on sales into the state. For instance, online retailer Amazon.com has no property or employees in Georgia, so Georgia cannot force the company to collect sales taxes on its sales in the state.

Georgia consumers, however, must pay a “use” tax on the purchase, an often-unenforced law stemming from the anti-competitive idea that taxes and prices should be equalized within and between states. But Georgia is unwilling to collect taxes from its own citizens.

Since the state cannot force online and out-of-state retailers to collect the taxes, it may try the pretty-please route. The Senate bill permits revenue officials to “employ contractors” to collect the taxes, “compensated only on a commission or contingent fee basis.” The Atlanta Journal-Constitution says proponents think it might raise as much as $30 million for the state’s budget.

I’m skeptical. If these vaguely defined “contractors” are the retailers themselves, it’s a matter of how much you have to pay a retailer to spend his time collecting taxes instead of retailing. If the contractors turn out to be private tax collectors, Georgia will run into serious problems with oversight and scope of authority. A similar tax collection program at the federal level using private contractors to collect allegedly unpaid taxes was shut down after serious incidents of abuse and harassment. The use of contingency fee lawyers to collect disputed hotel taxes in California is being challenged.

Also, $30 million isn’t a small sum of money. The federal government has an office in West Virginia where one can mail voluntary donations to reduce the federal debt. They’re even tax-deductible. Between 1982 and 2005, the feds have received 16,122 contributions totaling $9.8 million. If Georgia is really expecting to get three times that amount in just one year in just one state, it may not be as “voluntary” as the box at the museum.

It sounds more like it will be a “pay up or you-don’t-want-to-see-us-angry” situation. Not exactly the business-friendly reputation the Peach State is hoping to cultivate.

Joe Henchman is a constitutional attorney and tax policy analyst in Washington, D.C.