Present: All the Justices
BOARD OF DIRECTORS OF THE
TUCKAHOE ASSOCIATION, INC.
v. Record No. 980343 OPINION BY JUSTICE BARBARA MILANO KEENAN
January 8, 1999
CITY OF RICHMOND
FROM THE CIRCUIT COURT OF THE CITY OF RICHMOND
Theodore J. Markow, Judge
In this appeal, we consider the trial court's rulings that:
1) a city ordinance imposing utility taxes is unconstitutional
on equal protection grounds, and 2) a condominium unit owners'
association, which purchased utility services at commercial
rates, should be taxed as a residential purchaser under the
ordinance.
The Tuckahoe Association, Inc. (the Association), a non-
stock corporation organized under the Virginia Condominium Act,
Code §§ 55-79.39 – 79.103, is comprised of the individual unit
owners of the Tuckahoe Condominium. The condominium property
consists of one building containing 68 residential units and a
parking lot for the use of unit owners and their guests.
The Association purchases at commercial rates electricity
from the Virginia Power Company and natural gas from the
Richmond Department of Public Utilities. The amount of
electricity purchased is registered on one master meter and the
amount of gas purchased is registered on two master meters. The
Association purchases these utility services with funds received
from the individual unit owners' annual assessments. By
purchasing these services at commercial, rather than
residential, rates, the Association pays a significantly lower
amount for such services.
Pursuant to § 2.02 of its City Charter, the City of
Richmond enacted an ordinance imposing a utility tax on
telephone, electric, and gas service, which is collected by the
seller of each service. Richmond, Va., Code § 27-152.1. The
ordinance establishes different tax rates for purchasers of
commercial and residential service. Id. The terms
"residential" and "commercial" are not defined in the ordinance.
Since the Association purchased electric and gas services from
the utility providers at commercial rates, the City imposed its
commercial tax rate on those purchases.
The Association filed a motion for judgment under Code
§ 58.1-3984 to correct the City's allegedly erroneous assessment
of utility taxes. The Association alleged that it was a
"residential user" of the utility services and was entitled to a
refund of the amount of utility taxes paid "in excess of the
residential [tax] rate [it] should properly be charged." The
Association further alleged that the City's "classification of
[the Association] for purposes of the subject utility tax, not
having a reasonable basis for a commercial classification, is
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wholly arbitrary" and violates the equal protection clauses of
the United States and Virginia Constitutions.
The City responded that its utility tax ordinance expressly
classifies taxpayers based on the type of utility service
purchased, rather than on the nature of the ultimate consumer of
the service. Since the Association admitted that it purchases
commercial gas and electric service and is billed for those
services at the more advantageous commercial rates, the City
maintained that the Association was not entitled to be taxed for
those services under a residential classification.
After hearing argument on the parties' motions for summary
judgment, the trial court ruled that the residential and
commercial classifications contained in the ordinance are "not
based on real differences" and, thus, are arbitrary and
unreasonable. The court held that the ordinance
unconstitutionally delegates to the utility companies the right
to determine, based on their own internal regulations, who
qualifies for the more favorable residential service taxation
rate. The court concluded that "[a]s [the Association] has
successfully rebutted the reasonableness of the [City's]
commercial/residential classification, the court invalidates
this utility taxation scheme on equal protection grounds."
In an order denying the City's motion to reconsider, the
trial court stated that "the Richmond utility tax in this case
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is 'fatally indefinite' — it is literally devoid of any means to
determine how any utility service customer should be categorized
by the service provider for tax purposes. . . . [E]ach and every
customer classification is based upon utility company guesswork
and internal guidelines foreign to the ordinance itself."
The Association then filed an amended motion for judgment
seeking, in the alternative, a full refund of all utility taxes
paid from January 1993 through September 1997, or a refund of
utility taxes paid in excess of the residential rate during that
time period. The City filed a counterclaim, alleging that if it
had applied the residential tax rate to the Association's
utility purchases, the City would have assessed the utility tax
against each individual unit. The City alleged that, under this
methodology, the total amount of utility taxes owed by the
Association was greater than the amount of taxes the Association
actually paid at the commercial rate. The City requested
judgment pursuant to Code § 58.1-3903 in the amount of the
alleged underpayment.
At a hearing to determine damages, the City presented the
testimony of Andrew Roundtree, the City official responsible for
assessing the City's utility tax. Roundtree testified that if
the City were required to apply its residential tax rate to the
utility services supplied to the Tuckahoe Condominium, the City
would treat each unit owner as a residential customer. Since
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the units do not have individual meters, Roundtree explained
that he would divide the Association's total electric and gas
service charges by the number of individual units in order to
determine an average charge per unit. He would then apply the
tax rate to this average charge and multiply that amount by 68
to determine the total amount due from the Association.
Roundtree testified that, under this method, the Association
would owe $190.61 more for the time period at issue than the tax
that was actually assessed at the commercial tax rate.
The trial court entered a final order holding that the
Association "should be classified as 'residential' for purposes
of the City's utility tax scheme." In reaching this conclusion,
the court relied on § 27-151 of the City Code, which defines
"purchaser" as "every person who purchases a utility service."
The court stated that "each household/end-user at the Tuckahoe
building purchases these services on an individual basis through
its pro rata share of total condominium consumption." The court
found that the Association would have paid an additional $190.61
in utility taxes if the 68 individual units had been taxed at
the City's residential rate. On this basis, the court awarded
judgment on the counterclaim in favor of the City in that
amount. This appeal followed.
In reviewing the ordinance, we address the City's
assignments of cross-error because they determine the outcome of
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this appeal. The City first contends that the trial court erred
in holding that the ordinance is unconstitutional, because the
tax classifications are reasonable, and do not effectively
delegate the authority to the utility providers to determine the
rate at which purchasers of utility services will be taxed.
In response, the Association contends that the ordinance's
classifications are arbitrary, and that the ordinance improperly
delegates taxing authority to the utility providers by allowing
the providers to determine which purchasers qualify for the
different categories of services on which the tax is based. We
disagree with the Association.
The trial court did not specify in its ruling whether it
found the ordinance facially invalid or merely invalid as
applied to the Association. Because the court's ruling
incorporates principles derived from each of these concepts, we
review the constitutionality of the ordinance in both contexts.
When scrutinizing a tax classification contained in an
ordinance on equal protection grounds, we begin with the basic
principle that a government has broad powers of classification
for taxation purposes. See Cox Cable Hampton Roads, Inc. v.
City of Norfolk, 247 Va. 64, 66, 439 S.E.2d 366, 367 (1994).
The constitutional guarantee of equal protection does not
mandate that taxpayers be given identical treatment under a
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taxation statute. Id., 439 S.E.2d at 367-68. Instead, we have
said that this guarantee
"'only requires that the classification rest on real
and not feigned differences, that the distinction have
some relevance to the purpose for which the
classification is made, and that the different
treatments not be so disparate, relative to the
difference in classification, as to be wholly
arbitrary.' Walters v. City of St. Louis, Mo., 347
U.S. 231, 237 (1954). If the classification is
reasonable and not arbitrary, uniformity and equality
are not required."
Id. at 66-67, 439 S.E.2d at 368, (quoting City of Portsmouth v.
Citizens Trust Co., 216 Va. 695, 698, 222 S.E.2d 532, 534
(1976)); see also City of Richmond v. Fary, 210 Va. 338, 343-44,
171 S.E.2d 257, 261 (1969).
Like the ordinance in which they are found, the
classifications contained in an ordinance are presumptively
valid. Sheek v. City of Newport News, 214 Va. 288, 290, 199
S.E.2d 519, 521 (1973); Kisley v. City of Falls Church, 212 Va.
693, 697, 187 S.E.2d 168, 171 (1972). This presumption of
validity governs unless it is rebutted by unreasonableness
apparent on the face of the ordinance or by extrinsic evidence
clearly establishing unreasonableness. Sheek, 214 Va. at 290,
199 S.E.2d at 521; Kisley, 212 Va. at 697, 187 S.E.2d at 171;
National Linen Service Corp. v. Norfolk, 196 Va. 277, 279, 83
S.E.2d 401, 403 (1954). Thus, if a classification has some
reasonable basis and reasonably relates to the legislative
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objective of the ordinance, the local government may treat
different classes in different ways. Duke v. Pulaski County,
219 Va. 428, 433, 247 S.E.2d 824, 827 (1978).
We conclude that the present ordinance is facially valid.
Since the ordinance's classifications are based on the type of
utility service purchased, they contain distinctions resting on
real and not feigned differences. As evidenced by the record,
these distinctions are related to the apparent purpose of the
classifications, which is to allocate fairly the tax burden
imposed on utility service purchasers. The Association admitted
in the trial court that by purchasing commercial utility
services, it pays significantly less for its electricity and
natural gas than it would if it purchased residential utility
services in the same quantities. The utility tax
classifications contained in the City's ordinance impose a
greater tax rate on such volume purchasers who receive the
benefit of a lower purchase price from the utility provider.
Conversely, purchasers of residential service who pay a higher
unit cost than commercial purchasers for their utility services
are given the benefit of a lower tax rate. We hold that such
distinctions are not unreasonable or so disparate in their
treatment as to be arbitrary, and that the trial court erred in
concluding otherwise.
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We also disagree with the trial court's ruling that the
ordinance's classifications effectively delegate governmental
authority, allowing the utility providers to "pick and choose"
which purchasers will be deemed eligible for the lower
residential tax rate. Under the ordinance, the utility
providers' role is limited to collecting the utility tax. The
providers do not determine the particular rate of tax each
purchaser must pay.
When any individual or entity has purchased commercial
service from the provider, the provider is directed to collect
taxes based on the fixed commercial rate set by the ordinance.
Likewise, the utility provider is required to collect taxes due
from any purchaser of residential service at the fixed
residential rate contained in the ordinance. Although the trial
court reasoned that it is within the utility provider's sole
discretion to determine what type of service each customer
receives, we find no evidence in the record supporting such a
conclusion. The Association failed to prove its contention that
the utility providers control the ultimate tax imposed on a
customer by internal company rules regulating the availability
of commercial and residential services to a given purchaser.
Since there is no language in the ordinance or evidence in
the record to show that the utility providers exercise
discretionary authority under the ordinance, we find no merit in
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the Association's contention that the present case is controlled
by Chapel v. Commonwealth, 197 Va. 406, 89 S.E.2d 337 (1955).
There, we held that a former statute known as the Dry Cleaners
Act was invalid, because it delegated to the State Dry Cleaners
Board the power to promulgate rules and regulations controlling
dry cleaning businesses, without fixing any standard to guide
and control the Board's exercise of its discretion. Id. at 413-
14, 89 S.E.2d at 342. Unlike the statute at issue in Chapel,
the present ordinance does not delegate discretionary authority
to the utility providers. Thus, we hold that the trial court
erred in ruling that the ordinance is invalid on this basis.
We also note that the record fails to support a conclusion
that the ordinance is unconstitutional as applied to the
Association. The Association did not present evidence that it
was treated differently under the ordinance from any other
residential condominium unit owners' association with master
metering devices. The Association also failed to demonstrate
that the ordinance's application of the commercial utility tax
classification to its purchases of commercial utility service
was arbitrary or unreasonable.
We next consider the City's assignment of cross-error that
the trial court erred in ruling that the Association was
entitled to be classified as a purchaser of residential utility
services. The City argues that, under the plain language of the
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ordinance, the Association's purchase of commercial utility
services required that it be taxed at the commercial rate.
In response, the Association contends that the trial court
properly ruled that the Association is entitled to be classified
as a residential purchaser, because the Tuckahoe complex is used
solely as a place of residence. The Association also argues
that since the ordinance classifies taxpayers based on the type
of service purchased, rather than the commercial or residential
nature of the purchaser of those services, the ordinance
conflicts with Code § 58.1-3814. We disagree with the
Association.
As stated above, the trial court based its ruling on the
reasoning that each "household/end-user at the Tuckahoe building
purchases these services on an individual basis through its pro
rata share of total condominium consumption." This conclusion,
however, is directly refuted by the evidence, which showed that
the Association, a non-profit corporation, actually contracted
and paid for the utility services recorded on its master meters.
The fact that the individual unit owners' assessments are the
source of funds for payment of the corporation's obligations
does not alter the nature of those obligations or make the unit
owners purchasers under the ordinance.
The authority of a city to impose a tax by ordinance
depends upon a positive grant of authority by the General
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Assembly. Hampton Nissan Ltd. Partnership v. City of Hampton,
251 Va. 100, 104, 466 S.E.2d 95, 97 (1996); Williams v. City of
Richmond, 177 Va. 477, 484, 14 S.E.2d 287, 289 (1941). If the
city's charter grants a particular power to the city, an
ordinance passed pursuant to that grant has the same status as
an act of the General Assembly. Id.; Gordon Bros. v. City of
Newport News, 102 Va. 649, 650-51, 47 S.E. 828, 829 (1904).
Here, § 2.02 of the City's charter, enacted by the General
Assembly, authorizes the City "to levy on and collect taxes from
purchasers of any public utility service used within the city,
which taxes may be added to and collected with the bills
rendered purchasers of such service." 1948 Va. Acts of
Assembly, ch. 116. This grant of power plainly provides that
the purchasers, rather than the ultimate consumers or "end-
users," of such utility services are the proper objects of
taxation. The City's ordinance reflects this authority granted
by the charter, by imposing utility taxes only on the actual
purchasers of utility services who are rendered a bill for those
services.
We also find no merit in the Association's contention that
it is a "residential customer" within the meaning of Code
§ 58.1-3814 and, thus, that the ordinance conflicts with the
statute. Code § 58.1-3814 provides, in relevant part:
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A. Any county, city or town may impose a tax on
the consumers of the utility service or services
provided by any water or heat, light and power
company. . . which tax shall not be imposed at a rate
in excess of twenty percent of the monthly amount
charged to consumers of the utility service and shall
not be applicable to any amount so charged in excess
of fifteen dollars per month for residential
customers. Any city, town or county that on July 1,
1972, imposed a utility consumer tax in excess of
limits specified herein may continue to impose such a
tax in excess of such limits, but no more.
The Association contends that the purpose of the statute would
be defeated if it is denied the benefit of the residential
utility tax "cap" and charged a commercial tax, merely because
it took advantage of the best available utility rates offered by
the utility providers. We disagree.
In authorizing local governments to levy a utility tax on
"consumers" of utility services, Code § 58.1-3814 places a limit
on the amount of tax that can be imposed on a "residential
customer." As a commercial purchaser of utility services, the
Association is a "consumer" of those services, notwithstanding
the fact that the unit owners are the "end-users" of most of the
services provided. However, the Association is not a
"residential customer" of the utility providers, within the
meaning of the statute, because it does not purchase residential
service from those providers. The unit owners also are not
"residential customers" of the utilities, because they do not
individually contract and pay for their electric and gas
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service. Therefore, neither the Association nor the individual
unit owners are entitled to the benefit of the "cap" provided to
"residential customers" under the statute.
Based on the above holding, we conclude that the trial
court erred in ruling that the Association was entitled to be
"classified as residential for purposes of the City's utility
tax scheme." We also conclude that the trial court erred in
ruling that the individual unit owners should be treated as
purchasers of residential utility services, and that the
Association's utility tax should be computed on this basis.
For these reasons, we will reverse the trial court's award
of summary judgment in favor of the Association on its motion
for judgment, reverse the court's judgment in favor of the City
on its counterclaim, and enter final judgment for the City on
the motion for judgment.
Reversed and final judgment.
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