Lamar Advertising of Knox County, Tennessee, appeals a Chancery Court decision that upheld the validity of a Knoxville City Code provision requiring an annual inspection fee for ground and portable signs. Lamar, which operates 350 outdoor advertising structures in the city, challenges the ordinance on several grounds: it argues that the fee functions as a tax, leading to impermissible double taxation; it claims the ordinance lacks uniformity and equality as mandated by the Tennessee Constitution; and it alleges violations of the Equal Protection Clause of the Fourteenth Amendment and the First Amendment of the U.S. Constitution.
The ordinance, enacted in June 1986, mandates inspections for compliance with various codes, and establishes a tiered annual inspection fee based on sign size, ranging from $12 for signs up to 50 square feet to $100 for signs over 450 square feet. Non-profit organizations with tax-exempt status are exempt from these fees, provided they submit proof of their status.
To implement the ordinance, the City of Knoxville contracted with the Metropolitan Planning Commission (MPC) in 1987 to conduct inspections. However, the MPC personnel, supervised by Ewing Johnson, did not perform the required electrical and mechanical inspections but merely conducted an inventory of the signs. These employees lacked the necessary tools, training, and qualifications for the tasks outlined in the ordinance. The court's ruling was reversed and the case remanded for further proceedings.
The survey team's forms included entries for the sign content and whether the sign's purpose was advertising. Steve Ellis, hired as the City Sign Inspector, lacked experience and training in electrical or mechanical inspections and was unfamiliar with the city electrical code. His inspection method involved visually assessing signs from his vehicle, recording the inspection date and approval status on a form. At trial, expert witness Steve Harb, a certified public accountant, analyzed Ellis's inspection duration, concluding that each inspection averaged 5.478 minutes, costing the City $1.59 per sign. Revenue from these inspections goes into Knoxville's general fund, with fees not segregated from ad valorem tax forms. The City Finance Department collects delinquent inspection fees similarly to taxes. A key legal question arises whether the inspection fee is a legitimate fee or a tax intended to raise revenue. In Tennessee, fees are distinguished from taxes based on their purpose: if primarily for revenue generation, they are classified as taxes; if for regulating an activity under police power, they are considered fees. The City of Knoxville contends that the fee, despite exceeding actual inspection costs, must only reasonably relate to associated expenses. The City argues that a $100 fee for inspecting larger signs is reasonable, citing a precedent where the Supreme Court upheld a fee for liquor inspections.
The City of Memphis enacted an ordinance imposing a five percent inspection fee on liquor dealers, which was challenged as generating revenue disproportionately higher than the actual regulatory costs. The Court upheld the ordinance, citing the State's police power to regulate liquor due to its potential dangers to public health and welfare, and noted that the State Legislature did not require the fee to correlate with inspection costs.
However, in contrast, the Court found that outdoor advertising sign inspection fees must be reasonably related to the services provided. The case of Martin Media v. Hempfield Township was referenced, where a $100 annual fee for billboard inspections was struck down due to the minimal nature of the inspections conducted. The Court noted that Lamar had met the burden of proving that the sign inspection fees charged were essentially a tax, as they exceeded the actual cost of services rendered, which consisted only of visual inspections.
The Court identified this as a case of impermissible double taxation under the Tennessee Constitution, as Lamar already paid a gross receipts tax for leasing outdoor advertising signs. The City of Knoxville failed to demonstrate legislative intent to impose such double taxation. Consequently, the ordinance was deemed invalid, leading to the reversal of the Trial Court's judgment, with a directive to refund the $19,577 paid by Lamar with interest, and for further proceedings regarding costs.
