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City of Alhambra v. County of Los Angeles: Unlawful to Impose Property Tax Administration Fees on Triple Flip and VLF Swap Revenues

Under state law, counties are authorized to charge fees to cities and other local governments that receive property tax revenues for the costs of administering the property tax system in proportion to the amount of property tax received. These fees are referred to “property tax administration fees” or PTAF. State law does not authorize counties to charges the PTAF to school districts. Thus, the costs of administering the property tax system for school districts is borne by counties.

In 2003 and 2004, to resolve state budgetary issues, the Legislature enacted the “Triple Flip” and the “VLF Swap.” The Triple Flip transferred 0.25% of the sales tax that had previously been received by cities and counties to the State to be used to repay certain state-issued bonds. The State made the cities and counties whole by repaying the shifted sales tax from property taxes received by the Educational Revenue Enhancement Funds (“ERAF”) that exist in each county. (An ERAF was created by the Legislature in each county in the 1990s as the mechanism to siphon local agency property tax revenues to school districts, which benefits the State by reducing its obligations to fund schools.) The “VLF Swap” arose out of the reduction in the Vehicle License Fee, or VLF. When the State initially reduced the VLF, the State made up the lost revenues to cities and counties by making a direct payment from the State’s general fund to cover the lost revenues. The VLF Swap then replaced this backfill by transferring property taxes received by ERAF to the cities—similar to the Triple Flip. These replacement revenues are the so-called VLF Swap revenues.

Beginning in the 2006-2007 fiscal year, counties around the state began charging cities PTAF on the Triple Flip and VLF Swap revenues. The asserted basis for this practice was Revenue and Taxation Code section 97.75, which provides that, beginning in the 2006-2007 fiscal year, a county may charge a fee for the services performed by the county to implement the Triple Flip and VLF swap.

Forty-seven of the 88 cities in Los Angeles County brought an action against that County challenging its practice of increasing cities’ PTAF based on cities’ Triple Flip and VLF Swap revenues. The County prevailed at the trial court. In the July 7 opinion, the Court of Appeal reversed the decision of the trial court. The appellate court found that Section 97.75 specifically authorizes counties to charge cities only for the direct costs of administering the Triple Flip and VLF Swap and specifically prohibits counties from imposing the PTAF on the Triple Flip and VLF Swap revenues. The appellate court remanded the decision to the trial court to determine whether the cities’ claims for refund were timely filed and the amount of any refunds due the cities.

The County of Los Angeles will likely seek rehearing in the Court of Appeal and review or depublication in the California Supreme Court. For now, though, the decision is citable.

For more information about this case and how it may affect your community, or other property tax issues, please contact John Bakker at 800.464.3559.