Top NC court to settle coastal tourism tax dispute

North Carolina’s highest court could decide in the next year whether a coastal county violated state law by spending occupancy tax proceeds on general government services.

The ruling could clarify how much discretion local governments have when interpreting the General Assembly’s instructions.

Currituck County has had state permission since 1987 to levy an occupancy tax. At first, the tax could fund both tourism-related expenses and general county government bills.

“The last few decades, however, have seen a strategic shift,” according to lawyer Troy Shelton. He represents local taxpayers who are battling Currituck’s county commissioners at the state Supreme Court.

“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,” Shelton wrote in a September brief.

The Corolla Civic Association and 23 individual plaintiffs filed suit against the county in 2019. They argued that a 2004 change in state law limited permitted uses of occupancy tax money.

“The legislature eliminated the County’s power to spend occupancy tax dollars on general public services,” Shelton argued. “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.”

County commissioners were “displeased” and lobbied lawmakers to restore the county’s previous taxing flexibility, Shelton added. “Yet the legislature refused to go back.”

“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.”

Currituck faces no obligation to fund tourism-related expenses, Shelton explained. “Under the law, it is the County’s choice whether to levy an occupancy tax,” he wrote. “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.”

A trial judge ruled in favor of the county in 2021. But the North Carolina Court of Appeals reversed that decision in March 2024. Appellate judges sided with the taxpayers.

The county is asking the high court to overturn the appellate ruling.

“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 for the county in July.

“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.

Once county commissioners used their “judgment” to determine that an expense related to tourism, the dispute should have ended, the county argued.

The case could determine “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,” the county argued. The state Supreme Court also could decide “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.”

The ”significant alterations” in 2004 helped convince appellate judges to rule against Currituck commissioners, Judge Michael Stading explained. Those changes “convey an intent by the Legislature to narrow the scope of expenditures funded by the net proceeds of levied occupancy tax.”

“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,” Stading added.

Judge Toby Hampson agreed to reverse the trial judge’s ruling favoring Currituck County. Yet Hampson would have opened the door for a county victory.

Law enforcement, emergency medical services, and fire protection “might well be expenditures” that commissioners could justify as increasing use of Currituck’s tourism-related facilities, Hampson wrote. “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.”

Now the state Supreme Court could decide whether the county or its critics have offered the stronger legal case. The dispute has not yet been scheduled for oral arguments. It’s a court battle to watch in 2026.

Mitch Kokai is senior political analyst for the John Locke Foundation.