Two years ago I blogged about the first appellate opinion in North Carolina to take a serious look at what counts as a “tourism-related” expenditure for purposes of local occupancy taxes. The case was Costanzo v. Currituck County, and the question was simple:
May a county use occupancy tax proceeds to help fund public safety costs in a heavily touristed area?
The Court of Appeals said no, at least on the facts and legislative history presented in Currituck County.
Last month, the North Carolina Supreme Court said yes.
But the General Assembly may soon say, “Not so fast.”
Before diving into the details, here’s a quick refresher on occupancy tax basics (or you can read this post).
North Carolina counties and municipalities do not possess general authority to levy occupancy taxes. A local government must first obtain authorization from the General Assembly before levying this tax.
As a result, occupancy taxes are not uniform in the way property taxes or sales taxes are uniform. Each occupancy tax depends on its own local authorizing legislation. Most local governments cannot treat occupancy tax revenue as general fund revenue. Instead, they must use their occupancy tax proceeds to either promote tourism or for “tourism-related” expenditures.
Most occupancy tax statutes define that term as expenditures that, in the judgment of the board authorized to make spending decisions (the board of county commissioners, the city council, or a tourism development authority board), “are designed to increase the use of lodging facilities, meeting facilities, convention facilities, or similar facilities by attracting tourists or business travelers.”
That definition does not tell us whether traditional local government public services such as police, fire protection, sanitation, or road maintenance could reasonably be considered “tourism-related.” All of those services might primarily benefit residents but also impact tourists.
Tourists of course do not select a destination based on its excellent trash collection system. But if a destination gets a reputation for mounds of uncollected trash rotting at the curb, tourism absolutely could take a hit. Does that make trash collection “tourism-related”?
Reasonable people can disagree about where the tourism line should be drawn. That was what the courts were asked to do in the Currituck County case.
I won’t repeat the full analysis from my prior post, but in 2024 the Court of Appeals concluded that the General Assembly narrowed the permissible uses of Currituck’s occupancy tax proceeds when it removed from the county’s occupancy tax bill specific references to police protection and emergency services. The result was a broad-sounding conclusion: public safety costs such as police, fire, EMS, and related equipment were not tourism-related expenditures and could not be funded with occupancy tax revenue.
I expressed skepticism about that reasoning in 2024. The Supreme Court shared similar concerns when it reversed the Court of Appeals last month.
It held that Currituck County’s occupancy tax statute does not categorically prohibit the county from spending occupancy tax revenues on enhanced public safety services related to area tourism.
However, the Court did not say that all public safety costs, much less all traditional public service costs, are tourism-related. Nor did it say that any expenditure becomes tourism-related simply because a local board says so. Instead, it emphasized the discretion built into the statutory definition. Currituck’s local authorizing bill, similar to most local occupancy tax bills, permits occupancy tax revenue to be used for expenditures that, “in the judgment” of the relevant board, are designed to increase use of relevant facilities by attracting tourists or business travelers.
The Supreme Court concluded that Currituck’s commissioners could reasonably determine that enhanced public safety services in Corolla and other heavily touristed areas are tied to tourism. The record included evidence that Currituck’s population doubles during peak season, that demand for law enforcement, fire, EMS, lifeguards, and road maintenance increases during that season, and that the county’s reputation as a safe, family-friendly destination helps attract visitors.
For the dozens of other North Carolina local governments with occupancy taxes, the immediate lesson from the Currituck case is that an expense does not need to directly attract tourists (such funding a museum or music festival) to qualify as “tourism-related.” Expenses that help make tourism safe and sustainable can also be “tourism-related.”
That said, local governments should resist the temptation to read Costanzo too broadly.
That decision would not protect a board that transfers occupancy tax proceeds into the general fund and then uses those dollars for ordinary year-round services with no findings related to tourism, no tourism-specific analysis, and no connection to visitor demand.
The safer path remains the one I suggested in 2024: make the judgment expressly, make it before the money is spent, and make a record supporting the connection to tourism.
For example, a board or TDA considering occupancy tax support for traditional public services should identify the tourist-season demand, the geographic connection to tourism districts, the visitor-related service burden, and the way the expenditure is expected to attract or retain tourists or business travelers. That might include call-volume data, seasonal population estimates, traffic and access concerns, or evidence that the expenditure is limited to enhanced services above the baseline services provided to residents.
In short, a local government cannot simply announce, “This service is tourism related” and then be protected by the Currituck County decision when spending occupancy tax funds on that service. The local government must explain in detail why it believes a particular public service expenditure is related to tourism.
But the General Assembly may render all of this advice moot.
S 484, now titled “Clarify Tourism-Related Expenditures,” is intended to reverse the recent Currituck County decision.
The bill would amend the uniform occupancy tax provisions in G.S. 160A-215 and G.S. 153A-155 to expressly prohibit the use of occupancy tax revenue to fund solid waste collection, water and sewer, police, fire protection, affordable housing, education, or any other public service “ordinarily provided by a [local government] for its residents, or for purposes that are designed for or primarily benefit residents of the [local government] unless explicitly authorized by local act.”
For most local governments that levy occupancy taxes, this bill would dramatically limit the potential uses of that revenue as compared to the discretion provided by the Costanzo decision. However, some older local acts contain specific authorizations for police, emergency services, solid waste, or other traditional public services. Local governments with similar local acts may be in a different position from those relying only on the generic “tourism-related expenditures” definition.
Where does all of this judicial and legislative activity leave local governments?
First, review your local occupancy tax authorizing legislation. Do not assume that your authority is the same as Currituck’s or your county’s or your neighboring city’s. Local acts differ.
Second, identify who has the statutory authority to make spending decisions. In some jurisdictions it is the TDA. In others it may be the board of commissioners or city council. The entity with the statutory authority should be the one making the tourism-related judgment.
Third, for any expenditure that benefits both tourists and residents, build a record connecting the public service in question to tourism. The more the expenditure looks like a traditional public service, the more important the record becomes.
Fourth, watch S484. If it becomes law in its current form, the analysis changes dramatically. For many local governments, the question will no longer be whether public safety, water, solid waste, or similar services can reasonably be viewed as tourism-related. The only question will be whether the local act explicitly authorizes that specifc type of spending.