Tourism Groups Support Suit Against Currituck Tax At Top NC Court

By Carolina Journal Staff

Groups tied to North Carolina’s travel and tourism industry are backing a lawsuit against Currituck County at the state’s highest court. The suit from local taxpayers contends that county commissioners have violated state law when spending occupancy tax money.

The North Carolina Court of Appeals ruled against Currituck County in March 2024. More than a year later, the North Carolina Supreme Court agreed to hear the dispute.

“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 a friend-of-the-court brief filed Wednesday with the high court. “The undisputed evidence in this case is that Currituck County has been spending a portion of its occupancy tax revenues for general services, which is not consistent with that county’s occupancy tax legislation.”

The North Carolina Travel and Tourism Coalition, North Carolina Restaurant and Lodging Association, North Carolina Hospitality Alliance, North Carolina Vacation Rental Managers Association, and the Vacation Rental Managers Association all support the brief.

“Moreover, while each city and county that has statutory authority to collect occupancy taxes does so under individual statutes that apply to their own jurisdiction, the vast majority of these statutes have similar language that derive from a set of carefully developed and longstanding Occupancy Tax Guidelines supported by NCTTC and used by the Finance Committee and the Occupancy Tax Subcommittee of the North Carolina General Assembly in reviewing and approving draft occupancy tax legislation,” the brief continued.

“The position of Currituck County seeks to allow their County Commissioners to disregard the statutory limitations and conditions on their spending authority, render them a nullity, and simply transfer occupancy tax revenues into their general fund. That is clearly not correct under the law,” the travel and tourism groups argued.

Their brief labeled the Appeals Court’s decision “sound.” “The Currituck County statue does not authorize the spending of occupancy tax proceeds for public safety services and equipment,” the group’s lawyers wrote. “Those are general services which all local governments must provide.”

The travel and tourism groups “urge that any decision in this appeal must be careful not to upset the hundreds of occupancy tax statutes that apply to other jurisdictions, where no one has ever argued or contemplated that occupancy tax revenues may simply be transferred to a general fund for spending on general public services.”

The Corolla Civic Association and 23 individual plaintiffs originally filed suit against the county in 2019. The plaintiffs offered their written arguments to the state Supreme Court on Sept. 26.

“The General Assembly knows that tourism is an important industry for our State,” lawyer Troy Shelton wrote in a brief. “Part of the State’s strategy has been to permit local governments to fund improvements by levying an occupancy tax on the lodgings where tourists stay when they visit.”

“The State initially conceived of occupancy tax partly to promote tourism and partly to fund local governments,” Shelton added. “The last few decades, however, have seen a strategic shift. The General Assembly has increased the amount of occupancy tax that local governments can levy on lodgings while insisting that these tax dollars be reinvested to generate more tourism.”

Currituck County offers a “case study in this policy shift,” Shelton argued. From 1987 to 2003, lawmakers allowed the county to spend some occupancy tax proceeds on tourism and some on general county services.

“But in 2004 that changed. The legislature eliminated the County’s power to spend occupancy tax dollars on general public services,” Shelton wrote. “Consistent with its overall policy shift, the legislature began requiring the County to spend its occupancy tax dollars on generating more tourism by reinvesting this revenue into ‘attracting tourists’ to the County.”

“The County commissioners were displeased because the County had been using its occupancy tax dollars to subsidize general public services provided throughout the County. The commissioners lobbied the legislature to restore its old authority. Yet the legislature refused to go back,” Shelton argued.

“After this failure, the County tried something different — ignoring the law,” he wrote. “The County acted as if the 2004 amendment never happened.”

The North Carolina Court of Appeals ruled in March 2024 that Currituck commissioners had exceeded their authority when they used occupancy tax money to cover items other than tourism-related expenses. That decision reversed a trial judge who had ruled in favor of county officials in 2021.

Currituck County filed a petition in April 2024 for the state Supreme Court to take the case. The high court agreed in June this year to consider Currituck’s arguments.

“The North Carolina Court of Appeals should have applied the traditional standard for evaluating decisions of public officials and held that the Currituck County Commissioners have not abused their discretion in how they spend occupancy-tax revenue under a statute that authorizes them to use their ‘judgment,’” lawyer Christopher Geis wrote in the county’s July brief to the Supreme Court.

“The Currituck County Commissioners could reasonably judge that spending occupancy-tax revenue on public safety services, such as law enforcement, is necessary to attract tourists to their county,” Geis added.

“This case is about a local statute that allows the Currituck County Board of Commissioners to levy occupancy taxes on visitors and use the revenue for ‘tourism-related expenditures.’ The statute defines ‘tourism-related expenditures’ as those that, in the ‘judgment’ of the Board of Commissioners, will bring more visitors to the county,” the brief explained.

“This [Supreme] Court must determine whether the commissioners abused their discretion in making their determination about what is tourism-related – that is, whether they acted capriciously, in bad faith, or in disregard of the law,” Geis wrote. “If they have not acted this way, this Court must reverse the Court of Appeals and reinstate summary judgment in favor of the defendants.”

Currituck County justified the public safety spending by pointing to Corolla, the Outer Banks community that draws the bulk of the county’s tourists and generates the most occupancy tax revenue.

“The need for lifeguards and ocean rescue teams is seasonal, but the other public-safety costs are year-round because the county cannot hire employees to work in such jobs for only part of the year and so it must hire them for full-time work and move them to Corolla during tourist season,” Geis wrote. “The commissioners have judged these public-safety expenditures as tourism-related because they are caused by the influx of tourists.”

The Appeals Court’s 2024 decision cited a 2004 amendment to state law “narrowing the scope of how the County may use occupancy tax proceeds.”

“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.