On January 31, 2011, the California Supreme Court issued its long-awaited decision in California Farm Bureau Federation, et al. v. State Water Resources Control Board, No. S150518 (Cal. Jan. 31, 2011), which addressed the constitutionality of an annual levy imposed by the State Water Resources Control Board. While the court concluded that the statute imposing the water rights levy imposed a fee (not a tax) and was constitutional on its face, the court remanded to the Court of Appeals to determine whether the regulation implementing the statute was unconstitutional on an as-applied basis.

Under Proposition 13, all new taxes in California must be adopted by a two-thirds vote of the Legislature. The levy system at issue in Farm Bureau was adopted by a vote of only 53% and, therefore, would have been unconstitutional if the levy was a “tax” rather than a “fee.” The court found that the levy was a “fee” because the statute was not enacted for general revenue purposes (as a tax would be), and was imposed for the costs of the functions or activities of the water rights program. The court also rejected the fee payors’ argument that the levy imposed an impermissible ad valorem tax on real property, since the water rights at issue do not confer a right of private ownership in the watercourse and the levy is imposed for the right to use water.

The long-awaited ruling on the constitutionality of California’s water rights fee program provides little closure, since the court did not provide an in-depth analysis as to what is required for a fee to be proportional or reasonably related to the costs imposed on payors. However, the decision may still be useful to taxpayers wishing to challenge fees in California, as the court indicated the relevant factor is how the regulatory program actually expends the funds. A petition for rehearing has been filed in this case.