On August 11, 2022, the California Supreme Court issued its decision in Zolly v. City of Oakland, which could have a significant impact on local solid waste franchise fees.
Local governments often award franchises for solid waste collection and management. These franchises and associated franchise fees have traditionally not been treated as taxes or regulatory fees by local governments.
In Zolly, the Court examined whether Oakland’s solid waste franchise agreement constitutes a tax under Proposition 26. Oakland granted two solid waste franchises in 2012, under which the franchisees agreed to pay the city approximately $25 million annually.
Some solid waste franchise fees are based on the local government’s actual administrative costs of granting the franchise, but others are not. Local governments have traditionally argued that franchise fees are not considered taxes under Proposition 26.
The Court rejected Oakland’s argument that franchise fees are exempt under Proposition 26 as charges imposed for use of local government property. It noted that Oakland failed to show that the “right” granted to the franchisees was “anything more than the generally available prerogative to drive on public roads and rights of way.” The Court left open a door for Oakland to claim in further proceedings that it granted waste haulers a special ability to drive heavy vehicles and place waste bins on public streets.
The Supreme Court strongly hinted that solid waste franchise fees may qualify under a different Prop. 26 exemption, for "[a] charge imposed for a specific benefit conferred or privilege granted directly to the payor that is not provided to those not charged,” but only if the fee “does not exceed the reasonable costs to the local government of conferring the benefit or granting the privilege."
At the end of the day, Zolly requires local governments to take a fresh look at their solid waste franchise fees. There are a few takeaways from the Court’s decision:
Local governments cannot claim franchise fees are outside the purview of Prop. 26 because they are the product of voluntary contractual negotiations or are not directly imposed on residents.
Local governments cannot claim that a franchise is local government property that can be sold, rented, or leased.
Local governments likely can claim that their solid waste franchise fee is exempt from Prop. 26 as “a benefit conferred or privilege granted to the payor”; however, they will have to show that the fee does not exceed the reasonable cost to the local government of conferring that benefit.
If the solid waste franchise grants operators some special privilege to use public property beyond that enjoyed by the general public (like operating heavy trucks or placing waste bins on public roads and rights of way), the local government may still be able to argue that the fee constitutes a charge for use of local government property, but the extent to which this will be accepted in future cases is unclear.
Further litigation is very likely, so counties should consult with their counsel about whether the terms and rates of franchise agreements need to be modified in light of this decision.
For more information, please contact RCRC Policy Advocate John Kennedy.