North Carolina’s highest court will decide in the months ahead whether one county violated state law when spending occupancy tax money on law enforcement and emergency services.
How the North Carolina Supreme Court decides the case might be just as important as the ruling the court ultimately makes.
The General Assembly first gave Currituck County power to levy an occupancy tax in 1987. State lawmakers amended Currituck’s occupancy tax authority in 2004.
The case Costanzo v. Currituck County asks the state Supreme Court to decide whether the 2004 amendment tied local occupancy tax proceeds directly to promoting local tourism.
The North Carolina Court of Appeals ruled against the county in March 2024. The Supreme Court chose the Costanzo case for its first oral argument of this year on Feb. 17.
Currituck County argues that the 2004 law gave commissioners discretion to label particular government expenses as “tourism-related.”
“In this case, the legislature specifically chose to use a word here — ‘judgment’ — to give the county broad authority on how to use this money,” argued Christopher Geis, representing Currituck commissioners.
Critics respond that the 2004 law limited commissioners’ discretion.
“The county then ignored the change in the law,” Troy Shelton argued on behalf of plaintiffs challenging Currituck’s actions. “The Court of Appeals saw what happened exactly for what it was. The county’s been breaking the law, and it needs to stop.”
It would be unwise to read too much into questions Supreme Court justices posed to Geis and Shelton during oral arguments. Justices might have been testing legal theories for holes rather than signaling their own thoughts about the case’s outcome.
Yet the range of questions suggests justices could approach their ruling in multiple ways.
Justice Phil Berger Jr. suggested that the judicial branch might not be the proper venue for deciding whether county commissioners’ occupancy tax choices were reasonable.
“Why shouldn’t the question of reasonableness be for either the legislature or the voters and not the courts?” Berger asked.
Justice Trey Allen focused attention on the text of the local occupancy tax law.
“You can’t say on the face of it… that it excludes law enforcement,” Allen said. “Accordingly, I would think that we would interpret it broadly.”
Both questions point toward a conclusion that could favor Currituck commissioners. On the other hand, Justice Tamara Barringer raised a concern about the county’s decision-making process.
Commissioners placed the money in Currituck’s general fund. Sitting instead as the county’s Tourism Development Authority, the same officials could have made a more transparent decision linking occupancy tax dollars to specific tourism-related expenses. The TDA could have cited law enforcement or emergency services during its deliberations.
“If this board or authority actually made those expenditures, I don’t think we would be in the position we’re in now: speculating about whether there was judgment done and whether it was rational,” Barringer said. “That’s the friction point for me.”
Justice Richard Dietz focused on the proof Currituck County must offer to win the dispute with taxpayers. He outlined three possible options.
The least restrictive for the county government would be a “rational basis” review. Under that standard, courts would presume that the county commissioners’ decision complied with the law. Critics of occupancy tax spending would face the burden of showing that spending tourism dollars on public safety or emergency services was “irrational.”
A second, more restrictive option for Currituck’s defense would require the county to produce evidence after the fact showing that commissioners had debated the links between tourism and the challenged spending. The most restrictive option would require the county to produce meeting minutes or other evidence detailing commissioners’ use of their “judgment” at the time of their occupancy tax decisions.
Dietz characterized the county’s argument as choosing the second option. County commissioners’ critics argued that the most restrictive option would be more appropriate.
“What’s the rationale for saying it should be that higher standard rather than just rational basis review?” Justice Anita Earls asked after Dietz mentioned his three alternatives.
Chief Justice Paul Newby focused on the case’s bottom line. “If you were to prevail, what remedy are you seeking?” he asked Shelton.
Critics are pursuing a declaration that occupancy tax funds were “misappropriated,” an injunction against future misuse of funds, and restoration of misused funds for tourism-related items, Shelton responded.
State Supreme Court justices have signaled very different ways to approach the Costanzo plaintiffs’ request. The approach they take and the decision they make could set a significant precedent for future local government tax disputes in North Carolina.
Mitch Kokai is senior political analyst for the John Locke Foundation.