N. C. Supreme Court upholds COA's decision to outlaw "Impact fees" in land use cases. | Eastern North Carolina Now

    Publisher's Note: This article originally appeared in the Beaufort Observer.

    In a case that illustrates how important the election of appellant court judges is in this state, a severely divided N. C. Supreme Court last week let stand a 2010 Court of Appeals (COA) decision that outlawed real estate "impact fees" as a means of building schools. We say severely divided because the Supreme Court was split 3-3 with Justice Jackson abstaining for undisclosed reasons in the decision. The tie vote had the effect of upholding the lower court decision. But that means the lower court decision is without precedential value in other cases. Jackson is a conservative Republican. Had she participated, it is likely she would have sided with the plaintiffs and voted to outlaw the fees.

    The case comes from Cary. You can read the details of the case and the COA decision by clicking here.

    The simple explanation of the case is that Cary tried to impose a fee on builders to generate money to build schools. The fee was a sliding scale, depending on the number of bedrooms in a house, that averaged about $3000 per 3-bedroom house. Paying the fee was a condition of getting a building permit.

    The court upheld the COA's decision that found that local governments in North Carolina do not have the authority to impose such fees without explicit authority from the Legislature. But what may be more significant in the future, the COA also ruled that municipalities do not have the constitutional authority to impose taxes or fees for education (except in certain unique cases where municipalities have been authorized to impose school taxes). Rather the court held that the N. C. Constitution provides that county government is the entity responsible for education, in conjunction with the state.

    Further, the COA decision found the impact fees a violation of the Equal Protection Clause of both the N. C. and U. S. constitutions because they were applied only to certain construction projects and not across the board uniformly for all building permits. Legal eagles will note the importance of a ruling on taxes and fees that requires that they be equally and uniformly imposed.

    Several municipalities have tried to get the Legislature to either enable impact fees statewide or on a local basis. Those efforts have been fiercely opposed by the homebuilders and real estate lobbyists. The Cary case implies that even if the Legislature were to agree for municipalities to use impact fees for schools that may be an illegal unconstitutional tax.

    The case has broader implications still. One would assume that the same reasoning will be applied to other "creative" local revenue gimmicks that have in recent years been directed at environmental requirements. Other kinds of impact fees have been upheld, such as sewer tap-on fees where they are imposed uniformly and directly related to the authorized municipal service. But questions still remain even about some of those approaches because in some instances the fees are imposed on, or are higher, for developers (getting subdivisions approved) or builders in subdivisions as opposed to, for example, a homeowner adding bedrooms to an existing home or getting a building permit for a garage, deck etc.

    But as applied specifically to impact fees to provide funding for school construction, it would appear that these cases prohibit the assessment of such impact fees only in certain areas, such as where schools are overcrowded as opposed to throughout a school district where some schools may be underutilized. So the imposition of impact fees by a county becomes another issue. Had Cary's practice stood, then builders who built houses in Cary would be paying a higher "school tax" than builders who built houses in a rural area but within the same school attendance area.

    As applied locally, the Cary case raises a yellow flag for the City of Washington and Town of Chocowinity, both of whom have imposed fees on developers/builders that are not assessed equally, as a condition of approval of zoning, special use permits and building permits. What Cary did that was specifically outlawed was to tie the issuance of such permits to the payment of fees that have the effect of being general revenue raisers for a service that the city is not authorized to provide.

    The principal of law here is called Dillon's Rule. That says that all local government is a function of state government and therefore local governments have only those powers and duties specifically and explicitly assigned by the state to that particular type of local government. But in prescribing local government duties, such action may not violate either the state or federal constitutions. In other words, towns, cities and counties cannot simply decide that they will address what they deem to be a need or problem unless the authority to do so is explicitly authorized by the state.

    A strict reading of the Cary case would give credence to the argument that land use fees must be uniformly imposed and rationally related to the specific use of the property, as opposed to being another source of general revenue. Impact fees, such as water and sewer tap fees, appear to be legitimate. But fees that are spent for something other than direct services to the property but are spent on providing other specific services may be subjected to strict scrutiny under the Equal Protection Clause.

    Cary has spent over $780,000 on lawyers fighting the issue and now may have to refund all of the fees it has collected since July 1999. The amount Cary must now refund could run into the millions.

    But if the conservative vs. liberal balance on the Supreme Court is changed in upcoming elections, the COA decision may yet be overturned. We shall see.