Occupancy Taxes and “Tourism-Related Expenditures”

Published for Coates' Canons on April 04, 2024.

Nearly 200 North Carolina counties and municipalities levy occupancy taxes. Almost all of them are required to use some percentage of their occupancy tax revenues for “tourism-related” expenditures.  Last week our state courts issued their first appellate opinion examining exactly what types of expenditures qualify as “tourism related.”

In Costanzo v. Currituck County, the county’s use of occupancy tax funds was challenged by residents and businesses from Corolla, the town that generates a large majority of the county’s occupancy tax revenues.  The plaintiffs argued that the county’s occupancy tax expenditures on public safety services and equipment, water treatment facility construction, park facilities maintenance, and historic building restoration were not related to tourism.

The trial court that originally heard the case ruled in favor of the county and rejected the plaintiffs’ challenges.  But the Court of Appeals disagreed.  It reversed the trial court’s decision and determined that at least one category of expenditures—public safety costs such as police, fire, emergency medical services and equipment—was not “tourism-related” and therefore constituted an impermissible use of occupancy tax funds.

Did the court get this case right? What does this opinion mean for the many other North Carolina local governments that are also required to spend their occupancy tax funds for “tourism-related” purposes?  To answer those questions, we need to take a closer look at Currituck County’s occupancy tax authority and how it compares to others across the state.

It’s All About the Local Bill

As I discussed in this blog post, North Carolina local governments may not levy occupancy taxes on the short-term rental of accommodations such as hotels and Airbnb units without first obtaining specific authorization from the General Assembly in the form of local bills.

Most local bills require local governments to create a tourism development authorities (“TDAs”) to make specific decisions about how to spend occupancy tax funds.  TDAs generally must use those funds to “promote travel and tourism” and for “tourism-related expenditures,” a term usually defined as those that “in the judgment of the TDA, are designed to increase the use of lodging facilities, meeting facilities, or convention facilities in the city or to attract tourists or business travelers to the city. The term includes tourism-related capital expenditures.”

Beyond that definition, local governments and TDAs did not have much guidance on what exactly qualified as a tourism-related expenditure. By far the most common question I receive about occupancy taxes is, “Can we spend occupancy taxes on [. . .]?”  A new bandstand in the town park? Road improvements? Increased police patrols or trash pick-ups during tourist season?

My answers have always been a bit ambiguous, because reasonable people can disagree on exactly what expenditures are related to tourism.  I could make a case that almost any expenditure other than education costs might be tourism related.  Tourists likely do not care about the quality of local schools when deciding where to spend their vacations.  But they might care about whether they feel safe when walking around downtown or if public trash bins are overflowing or if there is sufficient public parking near the beach.

Absent additional guidance from the legislature or the courts, I often said, we don’t really know where the line is drawn between tourism-related and non-tourism-related expenditures.

Now we have some additional guidance from the courts. Before we dive into that opinion and its potential lessons for other local governments, I offer a little legislative history from Currituck County.

Occupancy Taxes in Currituck County

When the county first obtained permission to levy a 3% occupancy tax in 1987, Currituck was required to use 75% of the proceeds “only for tourist related purposes, including construction and maintenance of public facilities and buildings, garbage, refuse, and solid waste collection and disposal, police protection, and emergency services.”  The remaining 25% could be used by the county for any lawful purpose. (Session Law 1987-209).

In 1999, the County was authorized to levy an additional 1% occupancy tax to be used to support the Currituck Wildlife Museum.  (Session Law 1991-155).

In 2004, the General Assembly authorized the county to levy another 2% occupancy tax and amended the prior local bills to make Currituck County’s occupancy tax administration more consistent with those across the state.  (Session Law 2004-95)

The 2004 bill (i) eliminated the phrase “tourism-related purposes” and the specific examples used in the 1987 legislation and replaced them with “tourism-related expenditures, including beach nourishment,” (ii) added the standard definition of “tourism-related expenditures” (“Expenditures that, in the judgment of the Currituck County Board of Commissioners, are designed to increase the use of lodging facilities, meeting facilities, recreational facilities, and convention facilities in a county by attracting tourists or business travelers to the county. The term includes tourism-related capital expenditures and beach nourishment.”), (iii) eliminated the ability of the county to use any occupancy tax funds for general public purposes, and (iv) required the county to create a tourism development authority to spend occupancy tax funds in accordance with the new requirements.

The county’s occupancy tax was amended again in 2008 to increase the size of the TDA (Session Law 2008-54) and in 2013 to eliminate non-standard exemptions (Session Law 2013-414, Sect. 60(s)) Neither of these last two amendments affected the restrictions on the county’s use of occupancy tax proceeds.

The Court’s Reasoning

The Court of Appeals relied on Currituck County’s convoluted occupancy tax legislative history to conclude that the county’s use of occupancy tax funds for public safety costs was impermissible.

The court placed great weight on the fact that in 2004 the General Assembly eliminated the half-dozen examples of “tourist related purposes” in the 1987 bill (which specifically included police and EMS) and replaced it with the shorter “tourism-related expenditures, including beach nourishment.”  In the eyes of the court, the intent of the 2004 bill was to “narrow the scope of how the County is permitted to use occupancy tax funds.”  The court concluded that because “police protection and emergency services” were no longer offered as examples of “tourism-related expenditures” in the 2004 bill, that was evidence that the General Assembly no longer viewed police and EMS services as related to tourism.

I’m not sure I buy that logic.  Let’s pretend that yesterday I said to my kids, “For dessert, you can choose something sweet, including ice cream or pie.”   Today, I tell them, “You can have something sweet for dessert tonight, including a cookie or a chocolate bar.”  Does this change in language mean that ice cream and pie are no longer considered acceptable options for a sweet dessert? I don’t think so.  The use of the word “including” implies that the list following that word is not exclusive; my decision not to include ice cream or pie on my non-exclusive list of dessert options today does not mean I no longer intended for them to be permissible options.

I think the same could be said for the General Assembly’s decision to change from the long (non-exclusive) list of permissible uses of occupancy taxes in Currituck County’s 1987 bill (“including . . . police protection and emergency services”) to the much shorter list (“including beach nourishment”) in the 2004 bill. I don’t think that this change in language proves that the General Assembly intended to remove “police protection” from the universe of tourism-related purposes.

The Court of Appeals cited traditional statutory interpretation guidance to support its conclusion that a change in statutory language implies a change in meaning.  Perhaps.  But why else might have the General Assembly changed the language in Currituck County’s local bill?  One reason might have been simply to standardize the language in local occupancy tax bills across the state. In the 1990s and 2000s, dozens of local authorizing bills were amended to use the boilerplate “tourism-related expenditure” definition now used in the Currituck County bill.  (For examples, see this helpful list of all occupancy tax local bills maintained by the General Assembly staff. )

Besides, not every statutory word change denotes a substantive change in the intent of the law.  Case in point: the 2004 amendments to Currituck’s occupancy tax local bill also changed the phrase “tourist related purpose” to “tourism-related expenditures.” But the court agreed with the county that this word change had no substantive impact on how the county may use its occupancy tax funds.

The court also pointed out that the title of the 2004 bill—“An Act to Allow an Increase in the Currituck County Tax and to Change the Purpose for Which the Tax May Be Used”—implied a narrowing of the county’s permissible uses of the tax.  I agree, but that narrowing was the 2004 bill’s elimination of the county’s (unusual) authority from the 1987 act to use excess occupancy tax funds for any legal purpose. I do not think the bill title suggests an intent to also narrow the definition of “tourism-related expenditures.”

Of course, my opinion about the court’s logic has as much value as does my bet on my beloved Duke Blue Devils to win the 2024 national championship. (Sigh.)  But the county plans to appeal, and if that appeal is granted we will see whether the North Carolina Supreme Court agrees with me or the Court of Appeals.

What Does this Opinion Mean for Other Local Governments?

Assuming the Court of Appeals opinion stands, it is not entirely clear what impact it will have on other local governments who levy occupancy taxes.

One possibility is that the court’s prohibition against spending occupancy tax funds on police and EMS is relevant only for local governments with occupancy tax legislative history like that of Currituck County.  In other words, the only governments that are not allowed to spend occupancy tax funds on police or EMS are those that had police and EMS included as permissible uses in their original authorizing bills but had that language removed by later amendments to those bills, as did Currituck County.

While I have not read all 200 original authorizing bills, an abbreviated review identified at least a handful that reflect legislative histories similar to that of Currituck County.  See for example, Allegheny County, Session Law 1991-162, Caswell Beach, Session Law 1991-664, Holden Beach, Session Law 1987-963, and Sunset Beach, Session Law 1987-956.  You can look up your government’s local occupancy tax bills here.

Another possibility is that the court’s opinion should be read more broadly to mean that police and EMS costs are never “tourism-related,” regardless of a local government’s particular legislative history.  While the opinion spends a great deal of time discussing the evolution of Currituck County’s local bills, the court phrased its ultimate conclusion very broadly.  “We conclude that [police and EMS costs] are not “designed to increase the use of lodging facilities, meeting facilities, recreational facilities, and convention facilities . . . by attracting tourists or business travelers to the county.”  This is the same definition of “tourism-related expenditures” that currently applies to nearly all of the 200 local governments that levy occupancy taxes across North Carolina.  A broad interpretation of the Court of Appeals’ decision would mean that none of these counties may use occupancy taxes for police or EMS.

A middle ground between these two interpretations might be found in the concurring opinion issued by Judge Hampson.  Spending occupancy tax funds on police and EMS costs could be acceptable, wrote Judge Hampson, if the board of county commissioners were to first determine that such spending is related to tourism.  The county’s current occupancy tax legislation explicitly refers to the “judgment of Currituck County’s Board of Commissioners” in its definition “tourism-related expenditures.” (Similar language deferring to the judgement of the TDA or local government governing board is found in the boilerplate definition of “tourism-related expenditures” used in nearly all current occupancy tax authorizing legislation.)

Because the Currituck County board had never expressly concluded that the police and EMS costs were tourism related, Judge Hampson concurred with the conclusion that such use of occupancy tax funds was impermissible. But, unlike the majority, Judge Hampson determined that such spending would be acceptable if the board made that necessary finding.

Given the uncertainty about how best to interpret the court’s decision, for now my occupancy tax spending advice will likely reflect the middle ground described by Judge Hampson.

Were I approached by a local government that wanted to use occupancy tax funds on police or EMS costs, I would first determine if that local government’s occupancy tax legislative history was similar to that of Currituck County.  If so, then I would recommend against the use of occupancy tax funds for police and EMS costs.

But if not, I would advise that government to have the board charged with making those spending decisions (the county commissioners, the city council, or the TDA), to first make a finding that the police and EMS costs being funded with occupancy tax revenues are related to tourism. Perhaps the board could demonstrate the need to hire additional police and EMS personnel during the tourist season. Or it could show how calls for police and EMS services increased during tourist season.  The details of the decision matter less than the fact that the board will have demonstrated that it judged the particular expense to be related to tourism.

In fact, I think a TDA or government board should always make a formal finding about the connection between a particular occupancy tax spending decision and tourism.  Regardless of whether the expenditure’s connection to tourism is obvious (purchasing land for a new public parking lot next to the beach) or less so (improving the lighting and streetscape in a downtown business district), formal findings about the connections between occupancy tax spending and tourism may minimize the risk of costly litigation like the Currituck County case.

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