Uber, The City of Calgary, and Regulatory Charges
If you are not aware, the City of Calgary discussed and approved modifications to its livery by-law to allow ride-sharing services, such as Uber and Lyft. Without these changes, under the city’s existing by-law these services were ‘illegal.’
In essence, the city simply extended the current regulations to cover these new types of ride services. Specifically, drivers offering their ride-sharing services must have
- regular (annual or every 50,000km) vehicle inspections,
- proof of ability to work in Canada,
- proof of valid commercial insurance as required by the Government of Alberta,
- annual criminal background checks
- a driver’s license
- an annual operating license from the City
These are all very similar requirements for traditional taxi drivers. Immediately upon the passage of these modifications, Uber announced it will not resume operations in the City. Essential, Uber says the inspections, background checks, and annual license fee are “unworkable” for Uber drivers. This is because most ride-share drivers work part time and usually only for a short duration. That is, very few drivers drive regularly and on-going.
For me, the most interesting part of this whole discussion is that it really shines the light on a little known aspect of municipal public finance: regulatory charges. And an understanding of the case law surrounding regulatory charges can help shine light on the fee and possibly areas for Uber to consider for levying a challenge against the city.
Regulatory charges, historically known as license fees, are a revenue raising tool delegated to the provinces under section 92(9) of the Constitution Act. It is also a tool commonly delegated by the provinces to municipalities.
What is a regulatory charge? In legalese, it is an indirect tax found to be “ancillary or adherent to a regulatory scheme of regulatory or prohibiting trade.” What is a regulatory scheme? Well often at a municipal level it is a bylaw that provides a complete and detailed code for the regulation of trade. In the case of the trade in question, the complete and detailed code is contained in by-law 6M2007 called Livery Transport Bylaw. It includes the provision for the requirements to work in this industry (some of which are itemized above), obviously directed to ensure safety. According to the Alberta Municipal Act, regulating this trade is well within the jurisdiction of the municipality.
That leaves the charge, which in this case is the annual operating licenses, which for drivers in ride-sharing services is set to be $220 annually. This charge must satisfy certain legal requirements or otherwise be found ultra vires the municipality’s authorities.
First, the fee must be related to the regulatory by-law. Notably, the fee and how it is calculated must be clearly set out in the by-law. Since it is a flat fee, there is nothing to set out regarding its calculation and the fee is clearly itemized on page 23, satisfying this requirement.
Second, the line of cases that has developed related to the power of indirect taxation through a regulatory scheme is that the fee must either be used to dray the cost of regulation or be set as to modify behaviour. I am basing this discussion on the material outlined in my coauthored paper published in the Canadian Tax Journal.
The first case, dray the cost of regulation, seems to be the point of the proposed license fee on ride-share drivers. The supporting material for the revised by-law states twice that the by-law operates within a cost recovery model where license fees cover administration and enforcement costs.
However, there is no detail provided regarding the link between the regulatory costs incurred by the city and the fee. We only have the word of city officials that they will monitor these fees. This, I think, is a ground upon which Uber can push a little harder. In fact, the material notes specifically that the committee cited a lack of detailed financial information. The financial information is important because the revenues from the charge must only offset the regulatory costs and that intentionally designed surpluses are not permitted under this model, by law. I would note that the Supreme Court of Canada (in Westbank and 620 Connaught) has noted specifically that it expects actual or properly estimated costs of the regulation within the regulatory scheme and that the fee must be tied to the costs of the scheme. If I were Uber, I would push for the City to show that the fee satisfies this legal requirement.
I would note that there has been a lot of comparison between the City of Calgary’s flat fee and the City of Edmonton’s variable fee. If Uber can show that the costs of the regulation actually do vary by the amount a driver drives, then it could likely successfully argue that the flat fee set by Calgary does not reflect the relationship between the fee and the cost of regulating. However, given that the fee is established to offset the administrative and compliance costs of the regulatory scheme, I do not imagine these vary much with the amount a driver drives.
UPDATE: It has since been suggested that these costs do vary with volume. If this is true, then they can levy a challenge
— michael van hemmen (@mikevanhemmen) February 23, 2016
As a result, those suggesting that the City of Calgary enact a variable fee need to reconcile their preference with the reality of the costs the fee is designed to offset. And if a variable fee does not allow the City of recover the costs of administration, from what revenue source do they propose the shortfall be funded? I imagine the argument would be something like the substantial fee the City of Edmonton requires ride-share companies to pay annually, but as the City of Calgary noted, such a large fee then operates as a disincentive for other and smaller ride-share programs.
However, it may be the case that, while not stated, there is an intention by the city of modify behaviour, notably prohibit or limit ride-share drives in some way. If this is true, the city needs to tread carefully. First, even under this objective, there is still the requirement that there by a relationship between the fee and the objective. That is, the City must demonstrate how the regulatory charge intends to modify behaviour.
Second, it is not clear behavioural modification regulatory charges are permitted to be adopted by municipalities. And this is the direct results of the division of powers in the Constitution Act. The federal government is allowed to charge both direct and indirect taxes, pursuant to the Constitution Act, 1867, section 91(3). However, the provinces are only allowed to charge direct taxes, pursuant to section 92(2) and licence fees, pursuant to section 92(9). If the behaviour modification regulatory scheme were to be available to the provinces, it has the potential to allow indirect taxation without the limitation of cost recovery. Limiting the amount that could be recovered was the rationale for the origin of the cost recovery principle, as the Supreme Court sought to find a way for sections 92(2) and 92(9) to interact without creating unwarranted extensions. Section 92(2) allows for revenues to be raised without limitation to cost recovery. Section 92(9) allows cost recovery methods for indirect taxation, if ancillary to a regulatory scheme. However, if section 92(9) were to be read so as to allow behaviour-modifying regulatory schemes, it could render section 92(2) redundant as the same privileges would be available to both direct and indirect taxation.
In essence, the City of Calgary has operated within its authorities with the regulatory scheme; however, there are valid questions that could be asked by Uber and other ride-sharing service about the size and form of the license fee. The questions are valid and need to be answered clearly and definitively by the City to ensure the fee it a legal fee.