An East Lansing attorney and resident who challenged a 5% franchise fee imposed on utility customers finally has some vindication after the Michigan Supreme Court ruled in his favor—that it was an illegal tax.
In addition, the Supreme Court ruling could cost the city millions—both in money generated by the franchise fee and refunds to residents. The case stems from a franchise fee City of East Lansing officials forced on Lansing Board of Water & Light customers seven years ago, the Lansing State Journal reports.
The Michigan Supreme Court on Monday ruled in a 4-1 decision that the fee, which generated about $1.4 million a year, was a “disguised tax” by charging it through BWL.
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It’s the latest development in a five-year-old lawsuit filed by veteran attorney and East Lansing resident Jim Heos. Heos filed the class-action lawsuit against the city in April 2020, claiming the fees were unlawful taxes on residents.
The city may have to reimburse taxpayers more than $10 million dollars, and Heos suggests they’re also due interest on those payments. Heos told WLNS 6 News he felt vindicated by the decision and that East Lansing taxpayers will get their money back.
“I’m just happy that the citizens of East Lansing will be reimbursed for what was taken from them,” Heos said.
The idea for a franchise fee began in 2016 when the city was grappling over its pension debt, according to East Lansing Info.
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In 2017, City of East Lansing officials added the 5% franchise fee for BWL customers in the city to help make up for a budget shortfall, WLNS 6 News reports. The BWL collected the fee and passed it onto the city to put in its general fund.
Heos tried to warn city officials he believed the fees were illegal. He argued the franchise fee was a way to circumvent what’s called the Headlee Amendment to Michigan’s Constitution that limits the ability of local governments to raise taxes without voter approval.
The state’s highest court agreed and said the fee is a tax that was passed without voter approval. Since BWL services almost 90% of the city without an alternate utility provider, and electricity is a necessity, the fee was forced on residents as a way to generate revenue, the court ruled.
“Specifically, we conclude that the franchise fee functions as a tax because the fee was imposed for a general revenue-raising purpose, the fee was not proportionate to any costs the City incurred in LBWL providing electrical services, and the fee was not voluntary,” the justices state in their opinion.
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The city’s attorney argued the fee isn’t a tax and is allowed by the city’s charter. The city has said the franchise fee is needed to pay for maintenance of BWL service areas and collected about $1.4 million in fees per year.
The financial impact for the city of East Lansing or steps to reimburse taxpayers are unclear. East Lansing City Manager Robert Belleman told 6 News that “the city’s attorneys are reviewing the decision.”
The case made its way through the courts over the issue of whether the charges were a fee or a tax. An Ingham County judge initially ruled that the fee was a tax and that Heos had standing to challenge it in court. The Court of Appeals reversed that decision in April 2023 and Heos appealed.
BWL is owned by the City of Lansing and pays the city 6.1% of its total revenue in lieu of taxes. That amounted to about $25 million in 2022.
BWL serves most of the Greater Lansing area, including about 89% of East Lansing electricity customers as of 2023. Consumers Energy, which serves the remainder, declined to collect a fee from its customers after the city requested it in 2017.
Delta Township also implemented a franchise fee for customers shortly after East Lansing did so in 2017. An Eaton County judge ruled Delta Township’s fee was illegal in 2020, and the township owed BWL customers more than $2 million as part of that class-action lawsuit settlement, according to the State Journal.