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The Commonwealth Court of Pennsylvania recently published an opinion holding that West Chester Borough's ("West Chester") stormwater charge constituted a tax from which the Pennsylvania State System of Higher Education (the "Universities") was immune from payment. Borough of W. Chester v. Pennsylvania State Sys. of Higher Educ., No. 260 M.D. 2018, 2023 WL 27942 (Pa. Commw. Ct. Jan. 4, 2023).
West Chester operates a Municipal Separate Storm Sewer System (MS4) and imposes a stormwater charge on owners of developed properties that benefit from the system.
The Universities were assessed charges but refused to pay, arguing that the stormwater charge constituted a tax from which they were immune because state entities are immune from local taxation. West Chester argued that the charges were service fees and filed a petition in the Commonwealth Court of Pennsylvania to determine the rights and obligations of the Universities regarding the stormwater charges. The court held that the stormwater charge was a tax, not a fee.
West Chester filed an appeal to the Supreme Court of Pennsylvania, but the ruling already generated controversy among other municipalities with similar stormwater ordinances and tax-exempted entities.
Under the Clean Water Act, state and local governments must implement stormwater management to minimize environmental and economic harm to cities and local communities. In 2008, the National Research Council and the Environmental Protection Agency released a report identifying unmanaged stormwater from rain or snow events as a significant source of water pollution. As precipitation runs down rooftops and over dirty streets and sidewalks, the stormwater collects pollutants such as oil, fertilizer, litter, and pet waste. Stormwater runoff carries pollutants into nearby rivers, streams, and lakes.
Municipalities typically serve on the frontlines of stormwater management, but operating and maintaining stormwater infrastructure is a significant expense. Although various funding mechanisms are used around the country to build and improve stormwater management systems, a standard tool is implementing a fee on user-landowners who contribute to stormwater runoff.
Like many other municipalities, West Chester charges a stormwater fee to raise revenue that is redirected back into the system for specific stormwater projects. Municipalities will charge property owners a stormwater fee proportionate to the amount of impervious cover (ex., concrete) their property contains. In plain language, this means that the more impervious surface area on a property, which causes more stormwater runoff, the fee will increase.
Commercial properties, which often contain paved parking lots, service roads, large buildings, and sidewalks, burden a town's stormwater system more than a single-family home and are, therefore, likely to pay higher stormwater fees.
Ruling Hurts Municipalities’ Ability to Manage Stormwater Pollution
The Commonwealth Court's ruling disrupts West Chester's ability to assess fees against tax-exempted entities designed to defray the cost associated with implementing environmental regulatory requirements—shifting the cost now onto taxpayers and other members of the community.
Under the court's ruling, tax-exempted entities such as universities and churches that disproportionately burden stormwater systems no longer have to pay their fair share of the cost of stormwater management.
Despite the Commonwealth Court's holding that West Chester's stormwater charge constitutes a tax, the decision does not hold that all stormwater fees are taxes. The particular facts pertaining to West Chester's Stormwater Ordinance, the testimony, and the factual record developed in the proceeding tipped the scale towards West Chester's stormwater charge constituting a tax rather than a fee.
The court discussed the differences between a tax and a fee for service, noting that while a tax is imposed on many or all citizens, it contributes to a general fund. Municipalities use the collected revenue to benefit the entire community. Fees, however, provide a discrete benefit not shared by the community and are paid voluntarily.
The court found that West Chester failed to "point to any evidence that [the Universities] receive[d] discrete benefits through payment of the stormwater charge."
A Similar Case in Virginia, But With a Different Outcome
In a contrasting analysis, the Fourth Circuit Court of Appeals held that a similar stormwater charge imposed by the City of Roanoke was a fee, not a tax. Norfolk S. Ry. Co. v. City of Roanoke, 916 F.3d 315 (4th Cir. 2019). The City of Roanoke enacted a stormwater fee to fund its stormwater management system, similar to West Chester's program. Roanoke assessed a stormwater charge for Norfolk Southern Railway, but Norfolk Southern refused to pay and sued the city, alleging that the charge was a discriminatory tax against railways. The Fourth Circuit applied a multi-factor analysis to determine whether the charge was a tax or a fee. Unlike the Commonwealth Court, the Fourth Circuit found that the properties charged did receive a discrete benefit from the funded stormwater system by controlling and treating polluted stormwater contributed by developed properties.
Furthermore, the Fourth Circuit determined that the primary purpose of the stormwater charge serves a regulatory function to manage stormwater runoff to comply with state and federal requirements, constituting a fee rather than a tax.
As West Chester awaits an appeal to the Supreme Court of Pennsylvania, the lower court's ruling has widespread implications for the validity of stormwater fees. Carefully drafted stormwater ordinances must delineate that stormwater fees are tied to city services as an alternative to property owners dealing with stormwater discharge on an individual basis and that the purpose of revenue collected will fund specific stormwater projects. These considerations in structuring stormwater ordinances help stormwater charges to bear the characteristic of a service fee rather than a tax.
PennFuture has long championed the use of stormwater fees in PA and has even drafted a model fees ordinance. We are currently figuring out how best to support West Chester Borough and other municipalities and how to protect the use of stormwater fees in light of this ruling.
UPDATE: view the amicus brief here