Many states have, over the past decade, adopted e-waste fees of various kinds. In 2003, California enacted the Hazardous Electronic Waste Recycling Act (“Act”) for the purpose of providing sufficient funding for the safe, cost-free, and convenient collection and recycling of 100 percent of the covered electronic waste discarded or offered for recycling in the state. Cal. Pub. Res. Code § 42461(h). The Act also was intended to eliminate electronic waste stockpiles and legacy devices by December 31, 2007, end the illegal disposal of covered electronic devices, establish manufacturer responsibility for reporting efforts to phase out hazardous materials in electronic devices and increase the use of recycled materials, and to ensure that electronic devices sold in the state do not violate certain regulations adopted by the Department of Toxic Substances Control. Id.
Although the Act has many significant provisions, one of the most controversial is the electronic waste recycling fee (“E-Waste Fee”) that was created as part of the Act. Beginning on January 1, 2005, whenever a consumer purchases a new or refurbished covered electronic device (“CED”) “in a transaction that is a retail sale or in a transaction to which a use tax applies,” the consumer is required to pay an E-Waste Fee based on the screen size of the device. Cal. Pub. Res. Code § 42463(d).
As a practical matter, many large taxpayers doing business in California acquire and dispose of their CEDs outside of the state. For example, a corporation headquartered in Illinois may have operations across the country, including in California, which utilize CEDs that are purchased, stored, and distributed from the corporation’s Illinois headquarters. In this type of operation, when a CED breaks, it typically is shipped back to the headquarters, where a third-party vendor either refurbishes the device or disposes of it locally. Thus, although the CED is used in California, because these units are neither purchased nor disposed of in California, the E-Waste Fee is not collected by the suppliers. Nevertheless, when the business is audited, the state picks up the fact that the CEDs were purchased without payment of the fee, and a notice of determination is issued alleging that the business either failed to report, or underpaid, the E-Waste Fee.
Unfortunately, unlike other California hazardous waste fees, the Act contains no express provision explaining how CEDs used in the state, but purchased and disposed of out-of-state, should be handled. The Act also contains no express provision giving credit for fees paid to other states for the disposal of CEDs used in California. Thus, on the surface, it would appear that the E-Waste Fee is constitutionally infirm.
As many practitioners are aware, in order for a fee to be valid, it must be reasonably related to benefits conferred. The courts have held that charges allocated to a payor must bear a fair or reasonable relationship to the payor’s burdens on, or benefits from, the regulatory activity. See e.g., Northwest Energetic Services, LLC v. California Franchise Tax Bd., 159 Cal. App. 4th 841 (2008); Sinclair Paint Co. v. State Bd. of Equalization, 15 Cal. 4th 866 (1997); Collier v. City and County of San Francisco, 151 Cal. App. 4th 1326 (2007); Bay Area Cellular Telephone Comp. v. City of Union City, 162 Cal. App. 4th 686 (2008). In the scenario illustrated above, however, there is no relationship or nexus between the fee paid and the benefit conferred because the subject CEDs are disposed of outside the state.
Certainly, one could argue that the Act must have an implied fee exemption for out-of-state disposals, or an implied offset for fees paid to other states, because, without such provisions, the law is invalid as a violation of the due process and commerce clauses. See e.g., Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977); General Motors Corp. v. Tracy, 519 U.S. 278 (1997); Miller Bros. Co. v. Maryland, 347 U.S. 340 (1954); Moorman Mfg. Co. v. Bair, 437 U.S. 267, 273 (1978). Nevertheless, in a recent hearing, the State Board of Equalization has rejected this interpretation and chosen simply to enforce the facially invalid fee on the grounds that it cannot refuse to do so until an appellate court holds that the statute is unconstitutional. Consequently, businesses that receive a notice of determination under the aforementioned facts are faced with the unenviable choice of either: 1) paying a fee that is constitutionally infirm; 2) seeking a less than satisfactory resolution through settlement; or, 3) challenging the validity of the fee in court. Fortunately, however, the courts have occasionally awarded attorneys’ fees in cases where similar unconstitutional fees have been struck down. See e.g., Northwest Energetic. So taxpayers opting to challenge the E-Waste Fee in court may not have to incur the entire cost of litigation.