Something Smells Sour: the Nebraskasupreme Court Misunderstandsoccupation Taxes and Upholds a Rottenrestaurant Tax in Anthony, Inc. V.city of Omaha

• Publication year: 2022

46 Creighton L. Rev. 259. SOMETHING SMELLS SOUR: THE NEBRASKASUPREME COURT MISUNDERSTANDSOCCUPATION TAXES AND UPHOLDS A ROTTENRESTAURANT TAX IN ANTHONY, INC. V.CITY OF OMAHA

SOMETHING SMELLS SOUR: THE NEBRASKASUPREME COURT MISUNDERSTANDSOCCUPATION TAXES AND UPHOLDS A ROTTENRESTAURANT TAX IN ANTHONY, INC. V.CITY OF OMAHA

Wendy Marie Brown - '14

I. INTRODUCTION ................................... 259

II. FACTS AND HOLDING ............................ 261

III. BACKGROUND .................................... 266

A. An Unspoiled History: The Nebraska Supreme Court's Role in Preserving Occupation Taxes in the Past .................. 266

B. Colorado's Recipe for a Valid Occupation Tax ............................................. 269

C. More Cooks in the Kitchen: Kansas's Take on Occupation Tax Analysis ................... 269

D. Expanding the Menu: Washington's Approach to Occupation Taxes ................ 270

IV. ANALYSIS ......................................... 271

A. Nebraska's Own Occupation Tax Precedent Is Largely Irrelevant .......................... 272

B.The Nebraska Supreme Court Improperly Relied on Precedent from Colorado that Interprets Distinguishable Taxes ............. 275

C.The Nebraska Supreme Court Improperly Relied on Precedent from Kansas that Is Factually Distinguishable from Anthony, Inc. ............................................. 278

D. The Nebraska Supreme Court Misunderstood the State of Washington's Precedent ...................................... 280

V. CONCLUSION ..................................... 282

I. INTRODUCTION

Occupation taxes have been defined as taxes imposed on companies for allowing them to conduct their business in a particular state.(fn1)Additionally, occupation taxes might be used to reimburse a municipality for a business's use of city services and facilities.(fn2) But most generally, an occupation tax is considered a tax on the opportunity of doing business.(fn3) In Anthony, Inc. v. City of Omaha,(fn4) the Nebraska Supreme Court illustrated a continuation of Nebraska's long history of approving occupation taxes.(fn5) Yet only in this recent opinion did the Nebraska court define what an occupation tax is, and it did so by borrowing definitions from other jurisdictions.(fn6)

In Anthony, Inc., the Nebraska Supreme Court upheld an occupation tax instituted by the City of Omaha upon restaurants and drinking establishments within city limits.(fn7) Individual restaurants and members of the Omaha Restaurant Association (the "Restaurants") challenged the validity of the tax, arguing that because it was calculated as a percentage of gross receipts it was actually an unenforceable sales tax.(fn8) The court disagreed and determined that because the business, not the customer, remained liable for payment of the tax, the tax was not a sales tax but a proper occupation tax.(fn9)

This Note will first expose the Nebraska Supreme Court's error in Anthony, Inc. caused by its dependence on Nebraska precedent that had little bearing on the case at hand, primarily because the precedent was factually distinguishable from Anthony, Inc.(fn10) The court also failed to thoroughly apply the analysis of the cases on which it relied.(fn11) Second, this Note will show that the court made a similar mistake by introducing external precedent that had little significance beyond its shared use of the term "occupation taxes."(fn12) Finally, this Note focuses on the Nebraska Supreme Court's heavy reliance on Ford Motor Co. v. City of Seattle,(fn13) a case concerning Washington's view of occupation taxes, while failing to place the case in the larger context of Washington case law.(fn14) Specifically, this Note explains that this failure leaves unanswered the critical question of how a tax that in- creases the amount of sales tax paid by a customer can accurately be said to be an occupation tax and not a sales tax.(fn15)

II. FACTS AND HOLDING

In Anthony, Inc. v. City of Omaha,(fn16) the Nebraska Supreme Court addressed the validity of an occupation tax instituted by the City of Omaha ("City") in October of 2010, on Omaha restaurants and drinking establishments.(fn17) The Omaha City Council passed the tax to respond to budget shortfalls.(fn18) The City determined that individuals engaging in the restaurant business benefit from activity that places a unique burden on the City's resources.(fn19) The ordinance makes no mention of what that unique burden is,(fn20) but Omaha restaurants and drinking places were deemed to uniquely benefit from tourists and others engaged in discretionary recreational activity and were found to be dependent upon their location within the City, which creates access to City services.(fn21) Occupation taxes are often used to offset the demand placed on municipal resources by a business's location within the city.(fn22)

For this reason, the City found it would be appropriate to levy a tax on restaurants to raise revenue to support City resources.(fn23) Restaurants and drinking establishments are charged 2.5% of gross receipts derived monthly from selling food and beverages subject to the restaurant tax.(fn24) The ordinance defines a restaurant as a place held out to general public as a place preparing and selling food for immediate consumption.(fn25) A drinking establishment is a business offering on-premises consumption of beverages, whether alcoholic or nonalcoholic.(fn26)

The ordinance authorizes restaurant or drinking place to itemize the restaurant tax on the purchaser's bill or receipt, but the persons engaged in running the business remain responsible for payment of the tax.(fn27) The ordinance further specifies the restaurant tax is in addition to any other applicable fees, taxes, excises, and licenses.(fn28) The finance department for the City delivered letters to restaurants and drinking places subject to the restaurant tax.(fn29) These letters included instructions for the calculation of the restaurant tax in conjunction with calculating state and city sales taxes.(fn30) The instructions clarified that on a meal costing $100, the 2.5% restaurant tax would bring the total meal cost to $102.50.(fn31) The restaurant retains a 2% collection fee, which in the example given in the letter would be $0.05, leaving $2.45 to be remitted to the City.(fn32) The 7% state sales tax is to be applied to the post-restaurant tax total, generating $7.18 sales tax on a meal originally costing $100.(fn33)

In Anthony, Inc., the Nebraska Supreme Court heard an appeal brought by the Restaurants (including Anthony, Inc., Anthony J. Fucinaro, Jr., La Casa Pizzaria Inc., and members of the Omaha Restaurant Association) in a suit against the City.(fn34) In the original action, the Restaurants sought declaratory judgment and an injunction against the City, claiming that the restaurant tax actually imposed an illegal sales tax.(fn35) The Restaurants alternatively argued that the tax constituted an illegal occupation tax and illegal special legislation.(fn36)The Restaurants motioned for summary judgment declaring the restaurant tax invalid, illegal, unconstitutional, and unenforceable, and motioned the district court to enjoin the City's imposition and collection of the restaurant tax.(fn37) The Restaurants did not challenge the City's recommendation for calculating the total sales tax after the restaurant tax was added to customers' bills.(fn38) The district court denied the Restaurants' motions and instead granted summary judgment for the City.(fn39)

The Restaurants appealed directly to the Nebraska Supreme Court to reverse the district court's findings that the restaurant tax was not an illegal sales tax, was not an illegal occupation tax, and was not unconstitutional special legislation.(fn40) The court reviewed the case on appeal and affirmed the district court's findings.(fn41)

In affirming the district court's decision, the Nebraska Supreme Court focused primarily on the Restaurants' argument that the restaurant tax was not actually an occupation tax but rather a sales tax in excess of state statutory limits for sales and use taxes.(fn42) In Nebraska, municipalities are limited to imposing no more than 1.5% sales tax, in addition to the state sales tax of 5.5%.(fn43) Omaha already imposes the maximum 1.5% sales tax.(fn44) The court acknowledged that if the restaurant tax actually were a sales tax, it would violate statutory sales tax limits.(fn45)

Nebraska defines its sales tax as a tax imposed on the gross receipts derived from sales of personal property sold in retail in the state.(fn46) The court cited Nebraska's statutory section 77-2703(1),(fn47)which specifies that sales tax is collected from the consumer by the retailer, is part of the total purchase price, and is considered a debt that the consumer owes the retailer until the tax is paid.(fn48) The statute further explains that the tax is to be displayed separately from the price of rentals, sales, or leases.(fn49)

The court recognized that the restaurant tax shared similarities with a sales tax.(fn50) However, the court rejected the Restaurants' suggestion that these similarities indicated the existence of a sales tax rather than an occupation tax.(fn51) Instead, the court recounted general similarities between occupation taxes and sales taxes, including the fact that both are excise taxes used to raise revenue and levied on the performance of an act.(fn52) The distinction...