Top NC court will tackle Currituck occupancy tax dispute in February

Family walking along beach in Corolla — Image from visitcurrituck.com, run by the Currituck County Department of Travel and Tourism

The North Carolina Supreme Court will hear oral arguments on Feb. 17 in a case challenging Currituck County’s use of local occupancy tax money. It’s the first case on the high court’s calendar in 2026.

Local taxpayers challenging Currituck County’s use of its occupancy tax proceeds made their case to the high court in a brief filed in September. The taxpayers urge the high court to uphold a lower court ruling against the county.

“The General Assembly knows that tourism is an important industry for our State,” lawyer Troy Shelton wrote in the 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. It continued spending its occupancy tax dollars on general public services. But, contrary to the County’s arguments, general public services do not increase the use of lodgings or similar facilities by attracting tourists. Tourists do not visit the County to admire police departments, fire stations, and sewer plants. Tourists expect general public services as a bare minimum, but no tourist visits because of these public services.”

“If the County does not want to encourage tourism, it does not have to. Under the law, it is the County’s choice whether to levy an occupancy tax. But once it taxes, it must obey the spending conditions. The General Assembly does not want the County to make tourism more expensive through taxation unless it is also making tourism more attractive and thus increasing revenue,” Shelton added.

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. More than a year later, the high court agreed in June 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.

“When it was enacted in 1987, the statute defined such expenditures as including public safety services, and when it was amended in 2004 it gave the Board of Commissioners the authority to exercise its judgment about what such expenditures are,” Geis wrote. “The plaintiffs assert that public safety services, with the exception of beach lifeguards, are not tourism-related, but the commissioners believe that such services help provide a safe environment to which tourists want to come and return.”

“If paying for a beach lifeguard who rescues a tourist from rough surf is tourism-related, as the plaintiffs concede, then emergency medical technicians who take that tourist to the hospital after he or she has been rescued, or the law enforcement officers who prevent other tourists from getting into the surf, are also tourism-related, or at least the commissioners could reasonably believe so,” the brief continued.

“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.”

The county’s April 2024 petition cited two “significant” issues for the state Supreme Court to address.

“First, it is of significant public interest whether local government officials have the discretion to determine that spending on public safety services, such as law enforcement, is essential to attracting tourists to their jurisdictions,” Geis wrote.

“Second, it is significant to the jurisprudence of this State whether courts must apply the well-established standard for determining whether public officials have abused their discretion in spending tax revenues under a statute that gives them broad authority to do so,” he added.

The Corolla Civic Association and 23 individual plaintiffs originally filed suit against the county in 2019.

The General Assembly first granted Currituck County the right to assess an occupancy tax in 1987. The Appeals Court based much of its ruling on a 2004 amendment to the original local occupancy tax law.

“The Court of Appeals held that the Currituck County Board of Commissioners’ discretion in spending occupancy-tax revenue was limited and that it could spend ‘such funds … only as permitted by strict construction of the term “tourism-related” expenditures,’ which is contained in a 2004 amendment to the local statute at issue,” Geis explained. “The Court found that ‘the County did not act in accordance with’ the 2004 Amendment to the statute because it spent ‘occupancy tax proceeds for public safety services and equipment.’”

“Plaintiff-Appellants, who collect and remit the taxes but do not pay them, claim that Currituck County spends occupancy-tax revenue in violation of the statute and that many expenditures, especially those for law enforcement, emergency medical services, and fire protection, should not be paid for with this revenue because they are not related to tourism,” Geis wrote. “The county commissioners, who have used the discretion given them by the statute, disagree. They have unanimously judged that certain expenditures, including those on public-safety services required in response to the influx of visitors to the county during tourist season, are related to tourism.”

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.”

Currituck County defended its elected commissioners’ decisions about occupancy tax use. “The commissioners believe that their spending occupancy-tax revenues has been logically related to tourism and is within the discretion the statute provides them,” Geis wrote. “Their testimony provides a rational, reasonable basis for their decisions and shows they have used their best judgment in exercising their statutory authority.”

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.

“Top NC court will tackle Currituck occupancy tax dispute in February” was originally published on www.carolinajournal.com.