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Date: 05-15-2012


Case Number: 2012 OK 47

Judge: Kauger

Court: Supreme Court of Oklahoma on appeal from the District Court, Tulsa County

Plaintiff's Attorney: Gerald M. Bender, Steven G. Cousparis, Ellen R. Hinchee, Jessica E. Rainey, Attorneys for City of Tulsa, Tulsa, Oklahoma, for Plaintiff/Appellee.

Defendant's Attorney: Scott D. Boughton, Nancy A. Zerr, Assistants Attorney General, Oklahoma City, Oklahoma, for Defendant/Appellant

Description: ¶1 In 2010, the Oklahoma Legislature amended the Oklahoma Tax Code, 68 O.S. Supp. 2010 §2702(A)1 to require municipalities to contract with the State of Oklahoma through the Oklahoma Tax Commission (the Commission) to assess, collect and enforce municipal taxes. On June 1, 2010, prior to the amendment becoming effective on July 1, 2010, the plaintiff/appellee, City of Tulsa (City/Tulsa) contracted with a private company to collect municipal taxes. On August 19, 2010, Tulsa filed a petition for declaratory judgment in the District Court of Oklahoma County to challenge the constitutionality of §2702(A). The trial court, Honorable Bill Graves, found the statute unconstitutional. The State appealed and we retained the cause on July 22, 2011, and ordered the parties to brief the issues.

¶2 The constitutional questions are consolidated into two, whether: 1) 68 O.S. Supp. 2010 §2702(A)2which requires municipalities to contract with the Commission to assess, collect and enforce municipal taxes unconstitutionally impairs Tulsa's obligation of contracts; and 2) the statutory amendment infringes upon Tulsa's inherent powers granted by the Oklahoma Constitution and its city charter. We hold that requiring the Tax Commission to collect municipal sales and use taxes does not unconstitutionally impair Tulsa's obligation of contracts or infringe its inherent powers granted by the Constitution or the City's charter.


¶3 Prior to July 1, 2010, the Oklahoma Tax Code, 68 O.S. Supp. 2002 §2702(A)3 authorized municipalities such as Tulsa to contract with the Tax Commission to collect and enforce Tulsa's municipal taxes. The Commission was also authorized to collect up to 1 and 3/4 % of the funds it collected as a service fee.

¶4 Tulsa admits that, historically, it has voluntarily chosen to contract with the Commission for such services and that such contracts were terminable by either party upon proper notice as specified in the contract. In fact, it contracted with the Commission for a service fee of 1% of the municipal sales and use taxes, interest, and penalties it collected for Tulsa until May of 2010.4

¶5 The backdrop to this dispute is found throughout the Oklahoma Tax Code.5 The Commission has long been authorized to enter into agreements with cities, town, and municipalities (collectively municipalities) to collect and administer local sales and use taxes for a fee on behalf of the municipalities.6 However, it was not until the 2000 legislative session, that the Oklahoma Legislature, along with other states, began actively modernizing and streamlining municipal tax collections.

¶6 In 2000, the Oklahoma Legislature adopted the Streamlined Sales Tax System Act (the 2000 Act)7 in response to Legislative findings that:

1) state and local tax transactions should be treated competitively and neutral; 2) sales and use tax systems should be simplified; 3) revenue sources and fiscal sovereignty should be preserved; and 4) the administrative burden of collection should be reduced.8

The purpose of the Act was to direct the Commission to work with other states in developing and participating in a streamlined system for sales tax and use tax collection and administration.9

¶7 The next year, in 2001, the Legislature, in an apparent response to the Commission's work, adopted the Streamlined Sales and Use Tax Administration Act, which applied to state, county or municipality sales and use tax collection.10 The purpose of the 2001 Act was to simplify and streamline sales and use tax collections and reduce and eliminate the burden and costs of collecting taxes for both the state and its political subdivisions.11

¶8 As part of the simplification process, the Legislature authorized the State to work with other states and enter into agreements simplifying and modernizing sales and use tax administration to substantially reduce a taxpayer's burden of tax compliance.12 The agreements reduced the burdens of complying with local sales and use taxes by requiring states to administer sales and use taxes levied by local jurisdictions.13

¶9 Some nine years later, the legislature expanded its streamlining efforts during the 2010 Legislative session,14 when it passed House Bill 2359 which amended §2702(A) to require municipalities to contract with the Commission for collection of municipal taxes and set the required collection fee at 1 and 3/4 % of what was collected.15 On June 1, 2010, Tulsa entered into an agreement with RDS, a private company who specializes in the collection and recovery of taxes for cities in various states. On June 9, 2010, the 2010 legislative amendment to §2702 was signed by the Governor to become effective July 1, 2010.

¶10 On June 30, 2010, Tulsa amended its contract with RDS, making some minor adjustments to their arrangement. The next day, the statutory mandates of §2702 became effective. On August 19, 2010, Tulsa filed a petition for declaratory judgment in Oklahoma County District Court, seeking to have §2702 declared unconstitutional.16 It objected to two sections of the statute, §A, which required municipalities to contract with the commission,17 and, §D, which concerned auditing efforts of municipalities, based upon the premise that they were required to contract with the Commission.18

¶11 Tulsa argued that the statute was unconstitutional because it: 1) impaired its obligation of contracts; 2) limited its power to assess and collect its own taxes; 3) limited its ability to maximize its tax revenue; and 4) abrogated or limited City powers which were reserved in its city charter. Both the State and the City filed Motions for Summary Judgment. The trial court, on May 9, 2011, in a twenty-two page order determined the statute to be unconstitutional and it granted Tulsa's motion for summary judgment and denied the State's motion.19

¶12 The Commission appealed to this Court on June 9, 2011, and requested that we retain the cause rather than assign it to the Court of Civil Appeals. The motion to retain was granted on July 22, 2011, and additional brief's were ordered. The briefing cycle was completed on August 29, 2011.


¶14 The Oklahoma Constitution, art. 2, §15 provides:

No bill of attainder, ex post facto law, nor any law impairing the obligation of contracts, shall ever be passed. No conviction shall work a corruption of blood or forfeiture of estate: Provided, that this provision shall not prohibit the imposition of pecuniary penalties.

This provision also has a federal counterpart.20 Tulsa argues that the 2010 amendment requiring the Commission to collect Tulsa's sales and use taxes impairs its obligation of contracts -- specifically, the contract it entered into with the private vendor, RDS, on June 1, 2010, before the amendment's effective date. The Commission counters that contractual obligations may constitutionally be impaired even if the impairment is substantial when a significant and legitimate public purpose is being served by the State and the impairment is reasonable and necessary.

¶15 In Edmondson v. Pearce, 2004 OK 23, 91 P.3d 605, cert. denied by Tally v. Edmondson, 543 U.S. 987, 125 S.Ct. 495, 160 L.Ed.2d 371 (2004) we thoroughly examined the constitutional prohibition against the impairment of the obligation of contracts. Edmondson involved the constitutionality of a statute which outlawed cockfighting. It was alleged that private contracts to sell birds to be used for cockfighting could not legally be performed if the statute were upheld.

¶16 We recognized that the prohibition against impairing the obligation of contracts was not absolute because the constitutional provision does not operate to obliterate the police power of the state.21 When a state law has been alleged to fail to pass constitutional muster under the Contract Clause in regard to a contract between private parties, a three-part test is employed: 1) whether the law has, in fact, operated as a substantial impairment of a contractual relationship; 2) if so, whether the law serves a legitimate public purpose such as remedying a broad and general social or economic problem; and 3) if so, whether the adjustment of the rights and responsibilities of the contracting parties is based on reasonable conditions and is of a character appropriate to the public purpose behind the law's adoption.22

¶17 The public purpose requirement guarantees that the State is exercising its police power rather than providing a benefit to a special interest.23 When the State itself is not a contracting party to the contract which is alleged to have been impaired, we defer to legislative judgment as to the need and reasonableness of any specific law.24

¶18 Clearly, the contract between Tulsa and RDS is substantially impaired by the legislative change because it will no longer be subject to legal performance without running afoul of the Act. However, such an impairment does not necessarily constitute a violation of the Contract Clause. It is also unquestionable that the Legislature was acting in the furtherance of a legitimate police power.

¶19 The power to collect taxes, whether collected by the state or its subdivisions is inherent and is a necessary attribute of sovereignty. Without the power of taxation and its collection, necessary public services would be non-existent. The broad and general purpose being served is stated with the Act itself-- to simplify and streamline sales and use tax collections and reduce and eliminate the burden and costs of collecting taxes for both the state and its political subdivisions.

¶20 Historically, Tulsa had always contracted with the Tax Commission to provide such services. Given the deference to which the legislative judgment is entitled as to the need and reasonableness of this measure, there appears no deficiency in terms of the Act being an appropriate character to carry out or implement the purpose behind it. What better way exists to ensure that the burden and costs of collecting taxes for both the state and its political subdivisions be simplified, streamlined and reduced?

¶21 Nevertheless, summary judgment was granted in favor of the City declaring the statute unconstitutional. The City argues that: 1) the State has not made any connection or showing that the stated legislative purpose of the Act would actually be simplified, streamlined, and the burden and costs reduced by the State's collection rather than the City's; 2) there is no evidence that businesses or the City is more or less burdened or that the economy will suffer or thrive if the City were allowed to collect their own taxes; 3) nothing shows how the State's collection would be more uniform than if the City collected their own taxes; and 4) the State benefits financially from having a monopoly on municipal tax collection and has no incentive to charge anything less than the statutory cap of 1 3/4 % .

¶22 The burden is not on the State to answer the City's concerns. Rather, the burden is on the City to make such showings to overcome the presumption of constitutionality. In Lafalier v. Lead-Impacted Communities Relocation Assistance Trust, 2010 OK 48, 237 P.3d 181 at ¶15, we clearly expressed:

Even though the moving party must show that there is no dispute of fact and that they are entitled to judgment as a matter of law, there is a presumption that every statute is constitutional. The party seeking a statute's invalidation as unconstitutional has the burden to show the statute is clearly, palpably, and plainly inconsistent with the Constitution. We scrutinize a constitutional attack on a statute with great caution and grave responsibility. (Citations omitted.)

Requiring the Commission to collect municipal sales and use taxes does not unconstitutionally impair Tulsa's obligation of contracts.


¶23 The City argues that 68 O.S. Supp. 2010 §2702(A)25 unconstitutionally infringes upon the inherent powers as granted by the City's charter and the Oklahoma Constitution. In other words, the State overstepped its constitutional boundaries by interfering with the City's taxation power and revenue stream. It also insists that whenever a conflict exists between general state law and a city charter, the charter must prevail. The State contends that: 1) neither the City's ability to assess and receive sales and use tax nor its charter are infringed; and 2) even if a conflict existed, the charter must yield to wider public interest in uniform tax collection.

¶24 Tulsa is a municipal corporation organized under the Oklahoma Constitution art. 18 §§1-2.26 It is also a chartered city under a commission form of government with duly organized legislative and executive departments.27 Tulsa, pursuant to the Oklahoma Constitution art. 10, §20,28 and the Tax Code, 68 O.S. Supp. 2007 §§2701 et seq. has the legal authority to assess and collect municipal taxes for public purposes.29 Tulsa has adopted its own sales and use tax code for the purpose of assessing and collecting municipal taxes.30 Tulsa is also generally allowed to make contracts necessary to carry out its municipal affairs.31

¶25 The conflict between a city's and the State's taxing authority has long existed.32 Initially, it seemed, a city could, with limitations, provide in its charter for the assessment, levy, and collection of taxes in a manner other than provided by the general laws of the state. For example, in City of Collinsville v. Ward, 1917 OK 151, 165 P. 1145, overruled in part by Bodine v. Oklahoma City, 1919 OK 368, 187 P. 209, in addressing a city's taxing authority, the Court held that the power of taxation provided in a city's freeholders' charter, framed and adopted in accordance with the Constitution and state law, superseded the general revenue laws of the state in conflict in so far as the taxation involved "purely" municipal matters.33 The Court did not define "purely" municipal.

¶26 Two years later, Ward supra, was modified in so far as the City's tax purview being limited to "purely" municipal purposes in Bodine v. Oklahoma City, 1919 OK 368, 187 P. 209. In Bodine, the Legislature created a county excise board and when the City of Oklahoma City submitted its budget to the county board, the board tried to revise and correct the budget. The Court held that the city's power to assess and collect taxes is implied in its charter and the charter terms usurped the Legislature's general laws. The power of revision and correction of the city's tax budget lie with the mayor and city commissioners pursuant to the city's charter and not with the county excise board.

¶27 Bodine also recognized that: 1) a city charter may provide for the assessment, levy, and collection of a tax independent of the instrumentalities provided by the general laws of the state; and 2) a city had an inherent power to impose taxes for all necessary municipal purposes to function and that power is not limited to purposes which are "purely" municipal, expressly overruling Ward to the extent it conflicted with Bodine's holding. While Bodine touches on a city's power and authority to impose and collect municipal taxes, it is not totally dispositive of this cause because it did not squarely address the Legislature's authority to mandate a particular method of municipal tax collection and at what cost, if any, to a municipality.

¶28 In other cases, the Court recognized that while the Legislature delegates taxing authority to municipalities, it is Constitutionally prohibited from directly assessing municipal taxes itself.34 Nor may it do indirectly that which cannot be done directly.35 In still others, the Court addressed this delegation when a city operating under a freeholders' charter attempted to provide a method of enforcement of the collection of municipal taxes contrary to the Legislature's general statutes.

¶29 For example, in City of Sapulpa v. Land, 1924 OK 92, 223 P. 640, the City's charter provided that the board of commissioners may, by ordinance, provide a system for assessment, levy and collection of all municipal taxes. The board did so by adopting a city ordinance authorizing the district or superior courts to foreclose city ad valorem tax liens. The City of Sapulpa, just as Tulsa does in the present cause, relied upon the line of cases such as Bodine, supra and Ward, supra, which recognized that provisions of a city's charter become the organic law of the municipality and supersede the laws of the state which conflict with it.

¶30 The Sapulpa Court disagreed. Reviewing a multitude of constitutional provisions,36 stating in ¶¶20-22:

Upon a careful consideration of the provisions of section 3A, art. 18, of the Constitution, supra, it is manifest that it was the intention of the framers of the Constitution that all charter provisions must be subject to the general laws of the state, and by constitutional provisions, supra, no special laws shall be enacted where a general law may be made applicable. It is quite evident it was never the intention of the framers of the Constitution for municipal charter provisions, as authorized, to prevail over any general law of the state when its operation must be applicable to citizens alike throughout the state and all citizens are entitled to its protection.

Taxation is the exercise of sovereign authority, and the limitations placed by the Constitution upon the exercise of this sovereign authority must be construed so as to give effect to the intention, as evidenced by the language of such provisions. While it may be conceded that it was the intention of the framers of the Constitution by authorizing municipalities of over 2,000 inhabitants to adopt a charter to afford such inhabitants the fullest measure of local self-government consistent with the Constitution and laws of the state, yet it must be borne in mind that such municipalities, in exercising the power of taxation, become involved in a matter under our system of government which is the proper subject of constitutional and general law. This, for the reason that the exercise of the arbitrary power of taxation is subject to the regulation of the supreme sovereign power, which in such case is the state. This is necessary in order that the tax system may be uniform and afford all citizens equal protection of the law.

It is quite obvious from a fair and full consideration of the various provisions of our Constitution, supra, that it was the evident intention that our system of taxation be one uniform in its operation and effect and that such purpose may only be accomplished by the regulation of the subject by general and uniform laws.

¶31 The Court in Sapulpa also noted that:

1) under the expressed provisions of the Constitution must be collected pursuant to general laws and this method excludes every other; 2) taxes in this state must be assessed and collected pursuant to and under the authority of general laws enacted by the Legislature; 3) under our form of government, there can be no absolute self-governing American cities, no matter how limited as to subject, otherwise, an impossible sovereign within a sovereign would exist; 4) municipal corporations are bodies political and corporate created by the Legislature as governmental agencies of the state and they can only exercise such power as they derive from their source of creation; 5) the powers which municipalities exercise are at all times subject to legislative control and the state has power to determine what matters are of general public concern; and 6) the exercise of its power of a municipal government must be consistent with the organic law of the state and subject to the supreme powers of the Legislature.

¶32 Similarly, in Ryan v. Roach Drug Co., 1925 OK 912, 239 P. 912, a case in which a city attempted by charter provision to substitute its own system of budget approval contrary to the statutory system, the Court clearly stated that cities in this state receive authority to make tax levies by virtue of general laws enacted by the Legislature and not otherwise, and in the absence of legislative authority the city has no power to assess or collect a tax at all.

¶33 While nothing in the aforementioned decisions is dispositive of this cause, from all of those decisions the Court can conclude that: 1) municipalities through their charters may provide for municipal taxation and collection; 2) the Legislature through general laws of the state may provide for a uniform tax collection system; 3) the Legislature has the authority to determine that matters such as streamlining sales and use tax collection to reduce and eliminate the burden of costs of collecting taxes for both the state and its political subdivision are of public concern; and 4) the city's charter, to the extent it conflicts with the Legislature's streamlining scheme must yield in favor of the supreme powers of the Legislature.

¶34 The Supreme Court of Utah in Merkley v. State Tax Commission, 11 Utah 2d 336, 358 P.2d 991 (1961), reached a similar result when it reviewed a state statute that: 1) granted municipalities and counties the authority to levy sales and use taxes; and 2) mandated that the municipalities contract with the state tax commission to administer and operate its collection and distribution. The statute was challenged under various articles of Utah's Constitution including the prohibition of legislative delegation; the prohibition of the legislature levying municipal taxes; unlawful interference with the tax commission and local governmental agencies; prohibition of special laws; and that it was unreasonable, arbitrary, vague, and ambiguous.

¶35 The Utah Supreme Court upheld the statute noting that:

1) it was obvious that no legislative authority over cities was granted to counties nor delegated to the tax commission; 2) both cities and counties benefitted from the statute; 3) the tax commission was given no power over any county or city, but instead was burdened with a duty to collect the taxes for them, if levied, for an apparent modest fee; and 4) to require local governmental agencies to collect its own tax, would be duplication leading to a more expensive and quite impractical situation.

This rationale is very persuasive and appears equally applicable to the facts of this cause.37 We hold that Tulsa's constitutional and charter authority is not unconstitutionally infringed by the legislation.

¶36 The only remaining concern, if any, would be the "apparent modest fee." Here, the Legislative mandate includes a statutory mandated fee capped at 1 3/4% of the collection. Tulsa does not contend that this nominal fee is unrelated to the costs of collection or that it is an attempt by the State to do indirectly what it cannot do directly -- impose municipal taxes.38 Nor does Tulsa present any facts showing the mandated fee does anything other than merely recoup the costs of collection. Consequently, there is no reason to consider the fee as anything other than an apparent nominal fee related to the costs of collection.

* * *


Outcome: ¶37 Given the deference to which the legislative judgment is entitled as to the need and reasonableness of a simplified and streamlined sales and use tax collection for both the state and its political subdivisions, requiring the tax commission to collect municipal sales and use taxes does not unconstitutionally impair Tulsa's pre-existing contract with a private vendor for tax collection. Nor does such a statewide general legislative scheme of municipal tax collection infringe Tulsa's constitutional and charter powers. Accordingly, the trial court is reversed.


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