The difference between a tax and a fee, and why it matters

Some transactions are subject to both a tax and a fee. Some are subject to a fee but not a tax, or a tax but not a fee. Below we’ll explain the difference between a tax and a fee, and why it matters to businesses.

It’s more than mere semantics.

• A tax raises revenue to fund a general purpose or a dedicated purpose. A fee recoups the costs of providing a specific service.
• Some jurisdictions require taxes to be approved by a vote of the people. Fees generally don’t require voter approval.
• Courts may invalidate a fee if it functions more like a tax — especially in jurisdictions where taxes require voter approval, but fees don’t.

Buy a new car in California and you’ll be charged the applicable state and local sales tax. Buy new tires for that car and you’ll be charged sales tax plus the California tire fee.

If you buy $150 jacket from REI and have it shipped to Minnesota, the order will be subject to the Minnesota retail delivery fee. It won’t be subject to sales tax because most clothing is exempt in The North Star State.

You’ll pay state and local sales tax as well as the Colorado retail delivery fee if you buy the Thursday Murder Club books from Amazon (so entertaining) and have them shipped to Colorado. In some parts of the state, the delivery fee itself may be subject to local sales tax.

The purpose of taxes and fees is simple: to raise revenue. Why a tax is levied in some instances and a fee in others comes down to what the revenue will be used for, and/or what it takes for a jurisdiction to levy a tax or a fee.

A tax is a mandatory payment or charge collected by local, state, or federal governments. Taxes raise revenue for a general fund or a specific purpose that benefits all taxpayers, but not necessarily the taxpayer. My property taxes support the local public library and schools; I pay them even if I don’t use the library or have school-age children.

Another example can be found in California, where the bulk of state sales and use tax revenue goes into the state’s general fund, and portions are earmarked for specific services that benefit all taxpayers in the state. Local and district sales and use taxes in California fund services that benefit each community.

States often levy taxes that apply to key industries in the state. For instance, there’s a coal tax in North Dakota, the sixth-largest coal producing state, and a live entertainment tax in Nevada, home of Las Vegas.

A fee is a charge primarily intended to recoup costs incurred by providing a specific service to the payer. Like taxes, fees are collected by local, state, or federal governments and agencies. Unlike taxes, they’re usually only paid by the people who benefit from paying them.

National park fees maintain facilities and services used by visitors to national parks. Tolls help keep a bridge standing or a road free from potholes. I only pay these fees when I drive into certain national parks or across a tolled bridge. 

As with taxes, fees can reveal a lot about a state’s businesses, environment, or priorities. California, which is pretty big on environmental protection, is implementing a covered battery-embedded (CBE) waste recycling fee as of January 1, 2026. Texas has an oyster sales fee that generates revenue for oyster-related activities, such as collecting samples and studying oyster diseases.

Despite the textbook definitions of “tax” and “fee,” some taxes look more like fees, and some fees look more like taxes.

“In a perfect world,” says Scott Peterson, VP of Government Relations at Avalara, “fees would fund specific services for specific constituents and taxes would fund general services for the general public. But there are so many exceptions, it’s tough to find a clear distinction between a fee and a tax.”

Maine’s blueberry tax and Virginia’s sheep assessment illustrate his point.

• The blueberry tax, which is1.5 cents per pound, raises revenue for the state’s Wild Blueberry Commission. Half is paid by the seller and half by the processor/shipper.
• The sheep assessment, which is a 50-cent per-head excise tax, supports the promotion and economic development of the state’s sheep industry. The handler deducts the assessment from the amount due to the owner.

These two taxes are more like fees in that they are only paid by the people/businesses that benefit from paying them. “Many assessments on agricultural products meet what I think of as a fee because of how the revenue is used,” notes Peterson. “There are many agricultural marketing initiatives that are fully or partially funded by such assessments."

Whether a jurisdiction like a state opts to impose a tax or a fee usually comes down to the purpose of the revenue. However, in some cases, a fee may be implemented instead of a tax because the fee may face fewer roadblocks.

According to the Tax Foundation, 16 states require legislative supermajorities for tax increases. The Center on Budget and Policy Priorities notes that as of 2018, most of those states imposed such requirements in limited circumstances only, while seven states required a supermajority vote in both houses plus the governor’s signature to enact any tax increase.

Furthermore, some jurisdictions require voter approval for some or all new taxes. For example, California cities, counties, and special districts need a majority of voters to approve many tax increases, and the Colorado Taxpayer’s Bill of Rights (TABOR) requires voter approval for all tax increases.

There’s a similar situation in Michigan. Due to the Headlee Amendment to the state constitution, voters must approve all local tax increases above specified limitations.

Many fees can only be adjusted by an elected body. “There are fees that an agency can adjust, like the Colorado Retail Delivery Fee, but that is unusual,” explains Peterson. “If a fee doesn't require approval of an elected body (e.g., legislature, city council, county commission), it is almost certainly because the elected body that created the fee granted authority to an agency. Government agencies can only act because a law allows them to act.”

Peterson adds that whether a fee or a tax requires a public vote is very state/local specific. “If a state constitution or state law doesn't require a public vote, then the question should be, is what the government wants to fund something that benefits a select group, and is it possible to collect money just from that group? The courts invariably end up deciding such matters, because it’s hard to draw clear lines between a tax and a fee.”

That’s what happened recently in Michigan.

Michigan Supreme Court rules tax is an unconstitutional fee

In February 2025, the Michigan Supreme Court struck down an East Lansing local franchise fee on the grounds that it was a tax and not a fee and was not put to a vote of the people.

A bit of background. In 2016, the city of East Lansing learned its retirement system suffered from budget shortfalls. To solve this, the city negotiated a new franchise fee agreement with the Lansing Board of Water and Light (LBWL). The East Lansing City Council enacted the franchise fee (5%) by ordinance in June 2017. It did not put the fee on the ballot.

East Lansing LBWL consumers sued the city, claiming the charge was an improperly enacted tax that violated the state constitution. The city maintained the franchise fee was, in fact, a fee. The case ended up at the Michigan Supreme Court.

For guidance, the court looked to the ruling in Bolt v. City of Lansing (1998). This decision holds that a charge is a valid user fee only if it:

1. Has a regulatory purpose, not a general revenue-raising purpose
2. Is proportionate to the required cost of the service
3. Is voluntary

The Michigan Supreme Court determined the LBWL fee did not meet any of these three requirements.

1. It raised revenue for general purposes, not a regulatory purpose. The fee was created to fund pensions and other postemployment benefits.
2. It was not proportionate to any costs incurred by the city. The 5% rate was based on similar rates charged by other cities and didn’t correspond with costs incurred from LBWL’s provision of services.
3. It was mandatory.

Having determined that the “franchise fee is a tax,” the court held that the plaintiff is a taxpayer who may bring a Headlee Amendment claim for taxes wrongfully imposed within one year of the filing of this lawsuit. Additional details can be found in Heos v. City of East Lansing, Michigan.

The East Lansing case isn’t the only one of its kind. Another example arose in New Jersey, where the state’s $150 annual partnership fee was challenged as being a tax. In this instance, the courts determined the fee was properly characterized as a fee and let it stand.

Businesses are responsible for collecting (or paying) and remitting all applicable taxes and fees as required by the due date. In this respect, taxes and fees have similar compliance and reporting requirements for businesses. Failure to pay both taxes and fees on time usually results in penalties.

Yet as the Michigan case shows, businesses should understand how the taxes and fees they pay differ, and why those differences matter. Peterson says the Michigan test seems like a reasonable method to determine whether a fee is really a tax. “This is necessary in Michigan because the state requires voter approval for taxes.”

Avalara helps streamline the collection and remittance of taxes and fees for businesses in all industries. Learn more at avalara.com.

What are common fees that businesses pay?

Common fees include:

• Administrative or transactional fees, like inspection and permit fees
• Employment-related fees, like training fees or worker’s compensation administration fees
• Environmental and sustainability fees, like battery fees or electronic waste recycling fees
• Industry-specific program fees, like retail delivery fees and utility connection fees
• Licensing and regulatory fees, like business license fees and food service fees

What’s the legal difference between a tax and a fee?
A tax typically raises revenue for general government use or broad public benefit and may require voter approval. A fee funds a specific service used by the payer and usually doesn’t require a public vote.

Can a fee be challenged in court?
If a charge is labeled as a fee but seems to function more like a tax, it can be challenged in jurisdictions that have a voting requirement for taxes and not fees. Courts may strike it down — especially in states with constitutional limits on taxes, like California, Colorado, and Michigan.

Why does it matter if something is a tax or a fee?
Fees and taxes may be governed by different laws and approval processes. Misclassifying a tax as a fee (or vice versa) can lead to lawsuits, compliance issues, or penalties for governments and businesses alike.