Appeals Court rules against Currituck County in occupancy tax dispute

Image from

Listen to this story (11 minutes)

  • The North Carolina Court of Appeals has reversed a 2021 trial court ruling favoring Currituck County in a dispute over use of occupancy tax money.
  • Plaintiffs argued that Currituck commissioners violated a 2004 amendment to state law by spending occupancy tax proceeds on items other than tourism-related expenses.
  • Appellate judges ruled Currituck cannot use the funds for public safety. The decision also revived plaintiffs' claims about other challenged uses of occupancy tax proceeds.

The North Carolina Court of Appeals has ruled against Currituck County in its dispute with residents over spending of occupancy tax money. Tuesday’s decision means Currituck cannot spend occupancy tax proceeds on public safety services.

The decision also revives critics’ case against other challenged uses of occupancy tax money. Appellate judges reversed a 2021 trial court order favoring the county.

Appeals Court judges cited an amendment to state law in 2004 “narrowing the scope of how the County may use occupancy tax proceeds,” according to the majority opinion. The 20-year-old change limited the funds to promoting tourism.

“An application of guiding legal principles and precedent leads us to conclude that significant alterations to the original language contained in the Session Law and additions included in the Amendment convey an intent by the Legislature to narrow the scope of expenditures funded by the net proceeds of levied occupancy tax,” wrote Judge Michael Stading.

“The Amendment limits the discretion of the Board of Commissioners and requires that such funds shall be spent only as permitted by strict construction of the term ‘tourism-related expenditures,’” Stading added. “Considering the evidence contained in the record, in a light most favorable to the County, we hold that the County did not act in accordance with the Amendment when spending occupancy tax proceeds for public safety services and equipment.”

“This is not to say that the County has acted in bad faith, rather our determination is based on expenditures contained in the record which were no longer authorized after the Amendment was enacted,” Stading explained.

Judge Hunter Murphy joined Stading’s opinion.

Judge Toby Hampson agreed with his colleagues to reverse the trial judge’s ruling for the county. Hampson wrote separately to indicate his concerns about county commissioners’ budget process.

“[T]he County’s use of occupancy tax funds to fund law enforcement, emergency medical services, and fire protection might well be expenditures that, ‘in the judgment of the … 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.’ Here, however, the Record does not disclose that in appropriating the proceeds of the occupancy tax, the County — through its Board of Commissioners — exercised its judgment, or discretion, in so doing,” Hampson wrote.

A Currituck County Tourism Development Authority, created by the 2004 amendment, keeps one-third of occupancy tax proceeds. The rest of the money heads “back to the County’s general fund for spending by the County in the Commissioners’ discretionary budgetary authority,” Hampson wrote.

“Nowhere in this process is there any indication that the Board of Commissioners is exercising any judgment in determining what constitutes a tourism-related expenditure before funds are assigned to the general fund (or other special funds),” he added. “In my view, while it facially appears the County is proceeding in good faith and there is no allegation the County’s budgetary process does not conform to law, the County’s appropriations of the occupancy tax is being performed under a misapprehension of the applicable law.”

“I would conclude the County has abused its discretion in its appropriation of the occupancy tax revenues without exercising its judgment to determine it was expending those funds for tourism-related activities,” Hampson wrote.

Stading, Murphy, and Hampson heard oral arguments in the case in February 2023.

“We certainly disagree with the trial court that summary judgment was appropriate in favor of the commissioners,” said Robert Edmunds, a former N.C. Supreme Court justice representing the plaintiffs. “I think it’s fairly obvious that spending money for police and … fire isn’t going to attract tourists.”

On the other side of the argument, attorney Christopher Geis argued that state law gives county commissioners discretion to decide whether a particular spending item boosts local tourism. Commissioners have made those decision for nearly 20 years under current state law, Geis said.

“Because the commissioners’ decisions have been reasonable — and not arbitrary, capricious, or in bad faith — they have not abused their discretion as public officials to make these decisions. The court should defer to them,” Geis said.

In Costanzo v. Currituck County, 23 individuals and the Corolla Civic Association contend that county officials are violating a 2004 state law. Plaintiffs say the county is using occupancy tax money to fund items beyond permitted “tourism-related” expenses.

“The parties’ contrasting briefs present the Court with two incompatible options. Either, as Plaintiffs say, the 2004 statutory amendment provides a workable standard to review the County’s expenditure of funds derived from its occupancy tax or, as the County says, the County’s power to spend those funds is virtually limitless,” wrote the plaintiffs’ attorneys in a brief to the court.

“The County has created tests for those expenditures that it cannot fail unless it wants to,” plaintiffs argued. “In its brief, the County acknowledges that some expenditures, ‘absent other facts,’ would not be tourism-related. Specifically, the County states that using those funds for school textbooks or for social workers’ salaries would not be permissible ‘tourism-related’ expenditures. However, … the tests that the county uses (or purports to use) can readily justify those impermissible expenditures.”

“The tests that the County applies when determining what expenditures are ‘tourism-related,’ however, do not reflect what the General Assembly intended in 2004, nor are these adaptable tests consistent with what the 2004 amendment says,” according to the plaintiffs’ brief.

“Whenever local governments have stepped beyond their delegated powers, our courts have not hesitated to intervene,” plaintiffs argued. “Were it otherwise, counties could nullify State law, even though the counties themselves are merely creations of the State. Nothing supports that outcome.”

The Costanzo case attracted attention from groups that promote the state’s hospitality industry. The NC Travel and Tourism Coalition, NC Restaurant and Lodging Association, NC Hospitality Alliance, and NC Vacation Rental Managers Association filed a friend-of-the-court brief in October 2022. Those groups supported efforts to force Currituck County to comply with the 2004 law.

“Occupancy tax statutes are special taxes levied for a particular purpose — the support and development of tourism in a specific city or county,” according to the hospitality groups’ brief. “The decision of the Superior Court granting summary judgment contains no explanation for its decision, even though it appears there was evidence before the trial court that Currituck County is spending at least some portion of its occupancy tax revenues for general services, which is not consistent with that county’s occupancy tax legislation.”

Plaintiffs filed suit against the county in 2019. A trial judge ruled in December 2021 in favor of the county government. The friend-of-the-court brief argued that the Currituck case could affect other communities across the state.

“To the extent Currituck County seeks to argue that a tourism development authority can disregard the statutory limitations and conditions on its spending authority and transfer occupancy tax revenues into their general fund, that contention clearly is not correct under the law,” according to the brief. “Any decision in this appeal should be careful not to upset the hundreds of occupancy tax statutes that apply to other jurisdictions, where no one has ever argued that occupancy tax revenues may simply be transferred to a general fund for spending on general public services.”

The Travel and Tourism Coalition has been pushing since 1991 to have local occupancy taxes devoted to “growing the tourism economy,” the brief argued. “The occupancy tax is the only tax specifically targeting an industry where that industry is not opposed to the additional tax, as long as the proceeds of the tax are reinvested in tourism promotion or for tourism related expenditures.”

Currituck County’s 2004 occupancy tax law differs from statewide guidelines adopted in the 1990s, according to the tourism groups. Yet revenue from the county’s 6% occupancy tax still must be split between promotion of travel and tourism and “tourism-related expenditures.”

Yet at least some occupancy tax proceeds end up in the county’s general fund, according to the tourism groups. “[T]o the extent the County merely deposits occupancy tax revenue into its general fund for subsequent spending, doing so cannot either meet the legislative intent of Currituck’s legislation, or that statute’s specific language.”

The 2004 law marked a change, the tourism groups argued. Currituck’s original 1987 occupancy tax law allowed the county to count building construction, solid waste collection, and police and emergency services as “tourist-related” purposes.

Currituck’s critics argue that the county continues to use occupancy tax money for more general local government purposes.

“The fact that the 2004 Currituck Statute is titled ‘TO … CHANGE THE PURPOSES FOR WHICH THE TAX MAY BE USED’ should not be controversial or hard to interpret. The prior statute was being superseded and made to be in closer conformity to the Guidelines,” the tourism groups argued.

“The Guidelines do not contemplate the use of occupancy tax revenue for such general services as ‘police protection and emergency services’ that had been permitted uses under the prior Currituck statute, and certainly do not contemplate occupancy tax revenues raised for ‘tourism-related expenditures’ being transferred to Currituck’s general fund for subsequent spending.”

“The general services provided by local government are no doubt a key component of local government — but they are not tourism-related expenditures,” according to the brief.