Home / Fulltext Opinions / Supreme Court of Virginia / BOD OF THE TUCKAHOE ASSOC., INC. v. CITY OF RICHMOND (59790)





January 8, 1999
Record No. 980343




Theodore J. Markow, Judge
Present: All the Justices

In this appeal, we consider the trial court’s
rulings that: 1) a city ordinance imposing utility taxes is
unconstitutional on equal protection grounds, and 2) a
condominium unit owners’ association, which purchased utility
services at commercial rates, should be taxed as a residential
purchaser under the ordinance.

The Tuckahoe Association, Inc. (the
Association), a non-stock corporation organized under the
Virginia Condominium Act, Code Sects. 55-79.39 –
79.103, is comprised of the individual unit owners of the
Tuckahoe Condominium. The condominium property consists of one
building containing 68 residential units and a parking lot for
the use of unit owners and their guests.

The Association purchases at commercial rates
electricity from the Virginia Power Company and natural gas from
the Richmond Department of Public Utilities. The amount of
electricity purchased is registered on one master meter and the
amount of gas purchased is registered on two master meters. The
Association purchases these utility services with funds received
from the individual unit owners’ annual assessments. By
purchasing these services at commercial, rather than residential,
rates, the Association pays a significantly lower amount for such

Pursuant to Sect. 2.02 of its City
Charter, the City of Richmond enacted an ordinance imposing a
utility tax on telephone, electric, and gas service, which is
collected by the seller of each service. Richmond, Va., Code
Sect. 27-152.1. The ordinance establishes different tax
rates for purchasers of commercial and residential service. Id.
The terms "residential" and "commercial" are
not defined in the ordinance. Since the Association purchased
electric and gas services from the utility providers at
commercial rates, the City imposed its commercial tax rate on
those purchases.

The Association filed a motion for judgment
under Code Sect. 58.1-3984 to correct the City’s allegedly
erroneous assessment of utility taxes. The Association alleged
that it was a "residential user" of the utility
services and was entitled to a refund of the amount of utility
taxes paid "in excess of the residential [tax] rate [it] should properly be charged." The Association further alleged
that the City’s "classification of [the Association] for
purposes of the subject utility tax, not having a reasonable
basis for a commercial classification, is wholly arbitrary"
and violates the equal protection clauses of the United States
and Virginia Constitutions.

The City responded that its utility tax
ordinance expressly classifies taxpayers based on the type of
utility service purchased, rather than on the nature of the
ultimate consumer of the service. Since the Association admitted
that it purchases commercial gas and electric service and is
billed for those services at the more advantageous commercial
rates, the City maintained that the Association was not entitled
to be taxed for those services under a residential

After hearing argument on the parties’ motions
for summary judgment, the trial court ruled that the residential
and commercial classifications contained in the ordinance are
"not based on real differences" and, thus, are
arbitrary and unreasonable. The court held that the ordinance
unconstitutionally delegates to the utility companies the right
to determine, based on their own internal regulations, who
qualifies for the more favorable residential service taxation
rate. The court concluded that "[a]s [the Association] has
successfully rebutted the reasonableness of the [City’s] commercial/residential classification, the court invalidates this
utility taxation scheme on equal protection grounds."

In an order denying the City’s motion to
reconsider, the trial court stated that "the Richmond
utility tax in this case is ‘fatally indefinite’ — it is
literally devoid of any means to determine how any utility
service customer should be categorized by the service provider
for tax purposes. . . . [E]ach and every customer
classification is based upon utility company guesswork and
internal guidelines foreign to the ordinance itself."

The Association then filed an amended motion
for judgment seeking, in the alternative, a full refund of all
utility taxes paid from January 1993 through September 1997, or a
refund of utility taxes paid in excess of the residential rate
during that time period. The City filed a counterclaim, alleging
that if it had applied the residential tax rate to the
Association’s utility purchases, the City would have assessed the
utility tax against each individual unit. The City alleged that,
under this methodology, the total amount of utility taxes owed by
the Association was greater than the amount of taxes the
Association actually paid at the commercial rate. The City
requested judgment pursuant to Code Sect. 58.1-3903 in the
amount of the alleged underpayment.

At a hearing to determine damages, the City
presented the testimony of Andrew Roundtree, the City official
responsible for assessing the City’s utility tax. Roundtree
testified that if the City were required to apply its residential
tax rate to the utility services supplied to the Tuckahoe
Condominium, the City would treat each unit owner as a
residential customer. Since the units do not have individual
meters, Roundtree explained that he would divide the
Association’s total electric and gas service charges by the
number of individual units in order to determine an average
charge per unit. He would then apply the tax rate to this average
charge and multiply that amount by 68 to determine the total
amount due from the Association. Roundtree testified that, under
this method, the Association would owe $190.61 more for the time
period at issue than the tax that was actually assessed at the
commercial tax rate.

The trial court entered a final order holding
that the Association "should be classified as ‘residential’
for purposes of the City’s utility tax scheme." In reaching
this conclusion, the court relied on Sect. 27-151 of the
City Code, which defines "purchaser" as "every
person who purchases a utility service." The court stated
that "each household/end-user at the Tuckahoe building
purchases these services on an individual basis through its pro
rata share of total condominium consumption." The court
found that the Association would have paid an additional $190.61
in utility taxes if the 68 individual units had been taxed at the
City’s residential rate. On this basis, the court awarded
judgment on the counterclaim in favor of the City in that amount.
This appeal followed.

In reviewing the ordinance, we address the
City’s assignments of cross-error because they determine the
outcome of this appeal. The City first contends that the trial
court erred in holding that the ordinance is unconstitutional,
because the tax classifications are reasonable, and do not
effectively delegate the authority to the utility providers to
determine the rate at which purchasers of utility services will
be taxed.

In response, the Association contends that the
ordinance’s classifications are arbitrary, and that the ordinance
improperly delegates taxing authority to the utility providers by
allowing the providers to determine which purchasers qualify for
the different categories of services on which the tax is based.
We disagree with the Association.

The trial court did not specify in its ruling
whether it found the ordinance facially invalid or merely invalid
as applied to the Association. Because the court’s ruling
incorporates principles derived from each of these concepts, we
review the constitutionality of the ordinance in both contexts.

When scrutinizing a tax classification
contained in an ordinance on equal protection grounds, we begin
with the basic principle that a government has broad powers of
classification for taxation purposes. See Cox Cable
Hampton Roads, Inc. v. City of Norfolk
, 247 Va. 64, 66, 439
S.E.2d 366, 367 (1994). The constitutional guarantee of equal
protection does not mandate that taxpayers be given identical
treatment under a taxation statute. Id., 439 S.E.2d at
367-68. Instead, we have said that this guarantee

"’only requires that the
classification rest on real and not feigned
differences, that the distinction have some relevance
to the purpose for which the classification is made,
and that the different treatments not be so
disparate, relative to the difference in
classification, as to be wholly arbitrary.’ Walters
v. City of St. Louis, Mo.
, 347 U.S. 231, 237
(1954). If the classification is reasonable and not
arbitrary, uniformity and equality are not

Id. at 66-67, 439 S.E.2d at 368,
(quoting City of Portsmouth v. Citizens Trust Co., 216 Va.
695, 698, 222 S.E.2d 532, 534 (1976)); see also City
of Richmond v. Fary
, 210 Va. 338, 343-44, 171 S.E.2d 257, 261

Like the ordinance in which they are found, the
classifications contained in an ordinance are presumptively
valid. Sheek v. City of Newport News, 214 Va. 288, 290,
199 S.E.2d 519, 521 (1973); Kisley v. City of Falls Church,
212 Va. 693, 697, 187 S.E.2d 168, 171 (1972). This presumption of
validity governs unless it is rebutted by unreasonableness
apparent on the face of the ordinance or by extrinsic evidence
clearly establishing unreasonableness. Sheek, 214 Va. at
290, 199 S.E.2d at 521; Kisley, 212 Va. at 697, 187 S.E.2d
at 171; National Linen Service Corp. v. Norfolk, 196 Va.
277, 279, 83 S.E.2d 401, 403 (1954). Thus, if a classification
has some reasonable basis and reasonably relates to the
legislative objective of the ordinance, the local government may
treat different classes in different ways. Duke v. Pulaski
, 219 Va. 428, 433, 247 S.E.2d 824, 827 (1978).

We conclude that the present ordinance is
facially valid. Since the ordinance’s classifications are based
on the type of utility service purchased, they contain
distinctions resting on real and not feigned differences. As
evidenced by the record, these distinctions are related to the
apparent purpose of the classifications, which is to allocate
fairly the tax burden imposed on utility service purchasers. The
Association admitted in the trial court that by purchasing
commercial utility services, it pays significantly less for its
electricity and natural gas than it would if it purchased
residential utility services in the same quantities. The utility
tax classifications contained in the City’s ordinance impose a
greater tax rate on such volume purchasers who receive the
benefit of a lower purchase price from the utility provider.
Conversely, purchasers of residential service who pay a higher
unit cost than commercial purchasers for their utility services
are given the benefit of a lower tax rate. We hold that such
distinctions are not unreasonable or so disparate in their
treatment as to be arbitrary, and that the trial court erred in
concluding otherwise.

We also disagree with the trial court’s ruling
that the ordinance’s classifications effectively delegate
governmental authority, allowing the utility providers to
"pick and choose" which purchasers will be deemed
eligible for the lower residential tax rate. Under the ordinance,
the utility providers’ role is limited to collecting the utility
tax. The providers do not determine the particular rate of tax
each purchaser must pay.

When any individual or entity has purchased
commercial service from the provider, the provider is directed to
collect taxes based on the fixed commercial rate set by the
ordinance. Likewise, the utility provider is required to collect
taxes due from any purchaser of residential service at the fixed
residential rate contained in the ordinance. Although the trial
court reasoned that it is within the utility provider’s sole
discretion to determine what type of service each customer
receives, we find no evidence in the record supporting such a
conclusion. The Association failed to prove its contention that
the utility providers control the ultimate tax imposed on a
customer by internal company rules regulating the availability of
commercial and residential services to a given purchaser.

Since there is no language in the ordinance or
evidence in the record to show that the utility providers
exercise discretionary authority under the ordinance, we find no
merit in the Association’s contention that the present case is
controlled by Chapel v. Commonwealth, 197 Va. 406, 89
S.E.2d 337 (1955). There, we held that a former statute known as
the Dry Cleaners Act was invalid, because it delegated to the
State Dry Cleaners Board the power to promulgate rules and
regulations controlling dry cleaning businesses, without fixing
any standard to guide and control the Board’s exercise of its
discretion. Id. at 413-14, 89 S.E.2d at 342. Unlike the
statute at issue in Chapel, the present ordinance does not
delegate discretionary authority to the utility providers. Thus,
we hold that the trial court erred in ruling that the ordinance
is invalid on this basis.

We also note that the record fails to support a
conclusion that the ordinance is unconstitutional as applied to
the Association. The Association did not present evidence that it
was treated differently under the ordinance from any other
residential condominium unit owners’ association with master
metering devices. The Association also failed to demonstrate that
the ordinance’s application of the commercial utility tax
classification to its purchases of commercial utility service was
arbitrary or unreasonable.

We next consider the City’s assignment of
cross-error that the trial court erred in ruling that the
Association was entitled to be classified as a purchaser of
residential utility services. The City argues that, under the
plain language of the ordinance, the Association’s purchase of
commercial utility services required that it be taxed at the
commercial rate.

In response, the Association contends that the
trial court properly ruled that the Association is entitled to be
classified as a residential purchaser, because the Tuckahoe
complex is used solely as a place of residence. The Association
also argues that since the ordinance classifies taxpayers based
on the type of service purchased, rather than the commercial or
residential nature of the purchaser of those services, the
ordinance conflicts with Code Sect. 58.1-3814. We disagree
with the Association.

As stated above, the trial court based its
ruling on the reasoning that each "household/end-user at the
Tuckahoe building purchases these services on an individual basis
through its pro rata share of total condominium
consumption." This conclusion, however, is directly refuted
by the evidence, which showed that the Association, a non-profit
corporation, actually contracted and paid for the utility
services recorded on its master meters. The fact that the
individual unit owners’ assessments are the source of funds for
payment of the corporation’s obligations does not alter the
nature of those obligations or make the unit owners purchasers
under the ordinance.

The authority of a city to impose a tax by
ordinance depends upon a positive grant of authority by the
General Assembly. Hampton Nissan Ltd. Partnership v. City of
, 251 Va. 100, 104, 466 S.E.2d 95, 97 (1996); Williams
v. City of Richmond
, 177 Va. 477, 484, 14 S.E.2d 287, 289
(1941). If the city’s charter grants a particular power to the
city, an ordinance passed pursuant to that grant has the same
status as an act of the General Assembly. Id.; Gordon
Bros. v. City of Newport News
, 102 Va. 649, 650-51, 47 S.E.
828, 829 (1904).

Here, Sect. 2.02 of the City’s charter,
enacted by the General Assembly, authorizes the City "to
levy on and collect taxes from purchasers of any public utility
service used within the city, which taxes may be added to and
collected with the bills rendered purchasers of such
service." 1948 Va. Acts of Assembly, ch. 116. This grant of
power plainly provides that the purchasers, rather than
the ultimate consumers or "end-users," of such utility
services are the proper objects of taxation. The City’s ordinance
reflects this authority granted by the charter, by imposing
utility taxes only on the actual purchasers of utility services
who are rendered a bill for those services.

We also find no merit in the Association’s
contention that it is a "residential customer" within
the meaning of Code Sect. 58.1-3814 and, thus, that the
ordinance conflicts with the statute. Code Sect. 58.1-3814
provides, in relevant part:

A. Any county, city or town may impose a
tax on the consumers of the utility service or services
provided by any water or heat, light and power company. . .
which tax shall not be imposed at a rate in excess of twenty
percent of the monthly amount charged to consumers of the
utility service and shall not be applicable to any amount so
charged in excess of fifteen dollars per month for
residential customers. Any city, town or county that on July
1, 1972, imposed a utility consumer tax in excess of limits
specified herein may continue to impose such a tax in excess
of such limits, but no more.

The Association contends that the purpose of
the statute would be defeated if it is denied the benefit of the
residential utility tax "cap" and charged a commercial
tax, merely because it took advantage of the best available
utility rates offered by the utility providers. We disagree.

In authorizing local governments to levy a
utility tax on "consumers" of utility services, Code
Sect. 58.1-3814 places a limit on the amount of tax that can
be imposed on a "residential customer." As a commercial
purchaser of utility services, the Association is a
"consumer" of those services, notwithstanding the fact
that the unit owners are the "end-users" of most of the
services provided. However, the Association is not a
"residential customer" of the utility providers, within
the meaning of the statute, because it does not purchase
residential service from those providers. The unit owners also
are not "residential customers" of the utilities,
because they do not individually contract and pay for their
electric and gas service. Therefore, neither the Association nor
the individual unit owners are entitled to the benefit of the
"cap" provided to "residential customers"
under the statute.

Based on the above holding, we conclude that
the trial court erred in ruling that the Association was entitled
to be "classified as residential for purposes of the City’s
utility tax scheme." We also conclude that the trial court
erred in ruling that the individual unit owners should be treated
as purchasers of residential utility services, and that the
Association’s utility tax should be computed on this basis.

For these reasons, we will reverse the trial
court’s award of summary judgment in favor of the Association on
its motion for judgment, reverse the court’s judgment in favor of
the City on its counterclaim, and enter final judgment for the
City on the motion for judgment.

Reversed and final judgment.