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Supreme Court of Virginia hears city's tax ordinance appeal

The City of Charlottesville attempted to defend its tax ordinance to the state Supreme Court on Wednesday and overturn a lower court’s verdict that found a portion of it to be unconstitutionally vague.

The hearing was the latest in a legal saga that stretches back to July 2019 when a lawsuit was filed on behalf of author Corban Addison Klug claiming that the city unconstitutionally discriminates between different types of speech by taxing freelance writers and not traditional media and by being too vague about which professions are taxed.

The lawsuit specifically argued that the code violates both the First and 14th Amendments of the U.S. Constitution, which a Charlottesville Circuit Court judge partially agreed with in a ruling last year.

By state law, no locality can impose a license fee or levy any license tax “upon the privilege or right of printing or publishing any newspaper, magazine, newsletter or other publication issued daily or regularly at average intervals not exceeding three months, provided the publication’s subscription sales are exempt from state sales tax, or for the privilege or right of operating or conducting any radio or television broadcasting station or service.”

After ruling against Klug on the First Amendment argument, in January 2021 Judge Claude Worrell affirmed Klug’s 14th Amendment argument, ruling that the city’s tax code was unconstitutionally vague.

“The city has argued that [Klug] provides a service or business to his publisher. The Court disagrees. The Court finds the argument that [Klug] provides a service to this publisher to be forced, strained, or contrary to reason,” Worrell wrote.

Klug’s company, Regulus Books LLC, received an assessment from Charlottesville in 2018 for unpaid business license taxes dating back to 2015. Per court documents, Klug received a letter in July 2018 that he might be subject to the business license tax because “he included income from Regulus on Schedule C of his 2017 federal tax return under the category ‘Independent Artists, Writers and Performers.’”

Both the city and Albemarle County business codes cover dozens of occupations but they don’t mention writers. Because of that, writers had no notice that they would be taxed, Klug and his counsel have argued.

Citing broad interpretation of business and tax codes, the city has argued that Klug provides a service or business to his publisher and is thus subject to a business license tax.

Klug said he believes the catch-all phrasing of the city’s business ordinance does not specify to taxpayers who owes money and how much.

“My hope is that in the end the Supreme Court takes a rational, fair approach that says that, as applied, Regulus books and its author are not a repair or business service,” Klug said in an interview prior to the hearing.

“But that the City Council could, if it wished, include authors and in the line item and others like them, or recraft the catch-all to be more clear about who it actually encompasses,” he said.

During Wednesday’s state Supreme Court hearing, attorney John A. Rife argued on behalf of the city that the Charlottesville Circuit Court’s finding against the city was incorrect and that the ordinance should not be voided for vagueness.

Reading from the city’s ordinance, Rife argued that it is the intent that any “business, employment or profession located are conducted in the city” shall, except as otherwise specifically provided, be subject to an annual license issuance and taxed accordingly.

“Unlike what the lower court suggests, that we should name every occupation that’s out there, that’s simply not possible,” Rife said. “And if it ever were possible, or if this court were to decide that we have to name all of them, I wouldn’t mind being a publisher that has to publish that book.”

Proposing a hypothetical, Rife said that writing a story, typing it up and binding it is not a licensable activity, even if the writer owns a limited liability company, or LLC.

However, Rife argued that when an LLC negotiates for a manuscript to be published or recreated and sold worldwide, and the writer gets continued royalties for those activities and licensing of their intellectual property, it becomes a licensable activity.

“It’s the intent of the City Council that any business that’s operated within the city, unless specifically exempted, is to be taxed,” Rife said.

Arguing on behalf of Klug and Regulus Books, Renee Flaherty told the Supreme Court that, under Virginia law, taxes must be clear. It’s not clear that Regulus books is performing or providing a service, she said.

The Supreme Court must determine whether the ordinance is vague and does not apply or if it is vague but still applies to Regulus, Flaherty said, in either of which case they prevail.

“If the court interprets business service narrowly, the way it shouldn’t be interpreted, then it obviously doesn’t apply to Regulus,” she said. “But if the court were to interpret it the way that the city does, then it would be unconstitutionally vague.”

Flaherty said interpreting the ordinance the city’s way essentially turns the license tax into an income tax, which Virginia municipalities aren’t allowed to impose.

“If the city’s position is that it basically wants to tax all non-employment income from anyone who files a Schedule C, that is just stretching a business license tax and turning it into something else,” she said. “Democratic accountability is very important where taxes are concerned. People plan their entire lives around their tax liabilities.”

Klug is not the only person awaiting the state Supreme Court’s ruling. On the same day Klug and Regulus filed their lawsuit against the city, author John Hart filed a virtually identical lawsuit in the Albemarle County Circuit Court.

That lawsuit has been largely on hold pending the result of this appeal, said Institute of Justice attorney Keith Neely, who represents both Hart and Klug. Neely said he and the Institute view the cases as continuing in the Virginia and American tradition of combating taxation without representation.

“Even though this case is very much in the weeds and really directly impacts only our clients, we think that the principle behind it, this idea that the taxes should be clear, and that they should put individuals on notice that they’re subject to the tax, are important principles,” he said.


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