In California, a levy, charge, or exaction imposed by a local government is an unconstitutional and invalid tax if it does not qualify as one of seven enumerated tax exceptions and was not approved by at least a majority of voters. The California Court of Appeal for the Fourth Appellate District recently invalidated a water rate increase imposed on non-agricultural water users because the water district failed to produce evidence that non-agricultural water customers were solely responsible for paying increased groundwater replenishment fees. The case highlights the evidentiary burden on local governments to demonstrate an exaction is not a tax under the California Constitution. (Howard Jarvis Taxpayers Assn. v. Coachella Valley Water Dist. (Jan. 31, 2025 E080870) 2025 Cal.App. Lexis 44 (Howard Jarvis).)

Non-agricultural ratepayers challenged the Coachella Valley Water District’s (District) newly imposed water rates on the basis that they were being charged over three times more than agricultural users for essentially the same service. The non-agricultural ratepayers argued the rate violated the California Constitution, including Proposition 218 and Proposition 26, because it was passed without voter approval.

The term “tax” is not defined in Proposition 218 but is defined in Proposition 26 to include any levy, charge, or exaction imposed by a local government. Proposition 26 also identified seven exceptions to the definition of a tax. The District argued the non-agricultural water rate was not a tax because it qualified as one of two tax exceptions—either as a property-related fee or as a charge for specific government service that does not exceed reasonable costs. The Court of Appeal agreed with the trial court that the non-agricultural water rate was neither.

To qualify as a property-related fee, “[t]he amount of a fee or charge imposed upon any parcel or person as an incident of property ownership shall not exceed the proportional cost of the service attributable to the parcel.” (Cal. Const., art. XIII D, § 6, subd. (b)(3).) The District argued the non-agricultural water rate did not exceed the proportional cost of providing water to non-agricultural customers because those customers used more expensive supplemental water in comparison to agricultural customers who had previously paid a tax for the canal and irrigation distribution system that delivers such water. The court disagreed. The court held that the record did not support the District’s argument because the tax information from 1998 through 2015 showed non-agricultural customers paid 17 times more in taxes for the infrastructure than agricultural customers. The court also found that the District did not produce evidence to support the claim that agricultural customers did not use groundwater or that those customers did not increase the demand for more expensive supplemental water. Because the non-agricultural customers paid more through the prior tax and there was no evidence that agricultural customers were not also driving the demand for expensive supplemental water by taking groundwater, the court found the non-agricultural rate was not proportional to the cost of providing the service.

The court rejected the District’s reasonable cost government services or products claim for the same reasons. The court explained that the exception applies only if the local government proves that “the manner in which those costs are allocated to a payor bear a fair or reasonable relationship to the payor’s burdens on, or benefits received from, the governmental activity.” (Howard Jarvis, supra, 2025 Cal.App. Lexis at *33, citing City of Buenaventura v. United Water Conservation Dist. (2017) 3 Cal.5th 1191, 1212 [quoting Cal. Const., art. XIII C, § 1, subd. (e)].) Because the District allocated all of the expensive supplemental water to the non-agricultural customers and all of the benefits of cheaper water to agricultural customers, but produced no evidence that agricultural customers do not drive the demand for more expensive supplemental water by using groundwater, the allocation of costs was deemed to not be fair and reasonable.

This case serves as a reminder that the local government bears the burden of proving by a preponderance of the evidence that a levy, charge, or other exaction is not a tax under the California Constitution. To meet this burden, the local government must identify pertinent evidence to support its assertion that the levy, charge, or exaction falls within one of the seven tax exceptions.

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