Dear City Administrator,
You have the following question: Can the City use some of the revenue it derives from the
hotel-motel tax to provide lighting for the interstate inside the city limits? Private Acts 2012, Chapter
975 authorized the city to adopt a hotel-motel tax not to exceed 5%, by ordinance. The tax is to be used
“solely for tourism development, and the ordinance “shall set forth the manner of collection and
administration of the privilege tax.
As I told you on the telephone several days ago, I think that the hotel-motel tax can be used for
that purpose under the facts you related to me, which include that the interstate is inside the city limits,
and that it covers the business exits to the city along which city businesses are located. I indicated that I
did not know of any Tennessee statutory or case law on the question of whether that use of revenue
would reflect a use for tourism purposes, but that it appeared to me where the lighting provides a more
welcoming introduction to the city, that purpose would be consistent with the promotion of tourism.
However, I have since found some statutory and case law support for my conclusions.
But I have previously written about other legal questions dealing with the hotel-motel tax, some
of which may call into question the legal ability of the City to levy the hotel-motel tax. In retrospect, I
probably should have mentioned them. I will address those below, following which I will address the
question of whether hotel-motel tax revenues used to light the interstate reflects a use of those
revenues to promote tourism.
Limitations on the hotel-motel tax
Tennessee Code Annotated, § 67-4-1425(a), provides that after May 12, 1988, any private act
that authorizes a county or a city to levy a hotel-motel tax is limited as follows:
“(1) A city shall levy such tax on occupancy of a hotel located within its municipal boundaries;
(2) A city shall not be authorized to levy such tax on occupancy of hotels if the county in which
such city is located has levied such tax prior to the adoption of the tax by the city; and
(3) A county shall only levy such tax on occupancy of hotel located within its boundaries but
outside the boundaries of any city that has levied a tax on such occupancy prior to the adoption of such
tax by the county.”
With respect to the application of subsection(a)(2) above, your County appears to have levied a
hotel-motel tax of 3% in 1980 (See Private Acts 1980, chapter 260], and the City had not by May 12,
1988, levied any hotel-motel tax. For that reason, the City would be required to come within the
exceptions to those limitations.
Exceptions to the limitations on the hotel-motel tax: Admiralty Suites and Inns case
The City, though Public Acts 2012, Chapter 975, comes within the exceptions to the limitations
that are contained in Tennessee Code Annotated, § 67-4-1425(a). However, the city may have legal
problems with that exception.
The exceptions to that statute are found in Tennessee Code Annotated, § 67-4-1425(c) through
(i). Those subsections contain exceptions for various counties, some based on population brackets, but
subsection (c) contains some based on the descriptive characteristics of certain counties. Until relatively
recently, subsection (c) applied only to Shelby County. In fact, Admiralty Suites and Inns, LLC v. Shelby
County, 138 SW.3d (Tenn. Ct. App. 2003) (application for appeal to Tennessee Supreme Court denied
May 10, 2004.), speaks about both the limitations on the hotel-motel tax under Tennessee Code
Annotated, § 67-4-1425(a), and the exceptions to those limitations under Tennessee Code Annotated, §
67-4-1425(c):
In 1988, the Tennessee General Assembly enacted T.C.A. 67-4-1425,
which governs simultaneous county and city taxation of hotel occupancy
by private act. Section 67-4-1425(a) prohibits adoption of a private act
that results in the simultaneous taxation of hotel occupancy by a county
and the cities located within that county. Section 67-4-1425(c) exempts
Shelby County from the provisions of § 67-4-1425(a).
At the time of the enactment of § 67-4-1425(c), Shelby County had in
existence a county-wide hotel tax, which remains in effect ... [At 325]
[Emphasis is mine.]
The Court goes on to explain that the General Assembly had passed several private acts
authorizing hotel-motel taxes in Germantown, Collierville, Bartlett and Millington, the first three of
which had locally approved those private acts (Millington had not), and adopted ordinances authorizing
a 5% hotel-motel tax. It also pointed out that the General Assembly had added additional exemptions to
Tennessee Code Annotated, § 67-4-1425, codified in subsection (d), for Williamson and Rutherford
Counties. The suit in this case was to have subsections (c) and (d), as well as the private acts they
reflected, declared unconstitutional.
Admiralty Suites amplified what it had said about the limitations and exceptions contained in
Tennessee Code Annotated, § 67-4-1425(c) and (d), saying:
Tenn. Code Ann. § 67-4-1425(a) sets forth a general proscription against
double taxation on hotels and motels. Specifically, it prohibits counties
and a municipality therein from both levying occupancy taxes upon
hotels or motels within their borders. Instead, only the entity that first
levies an occupancy tax may maintain that tax. Subsections (c) and (d)
[now (c) through (h)] of Tenn. Code Ann. § 67-4-1425 then created
exceptions to this general proscription, allowing double taxation of
hotels and motels in Shelby, Williamson, and Rutherford Counties.
These exceptions were archived through the use of population
bracketing.... [At 236]
Here it is important to consider the most important issues considered by the court in
upholding the exemptions from the limitations.
- Whether the hotels and motels had standing to challenge the hotel-motel tax
(an issue that the plaintiffs did not even raise):
The answer was no, declared the court. Under the hotel-motel tax statute, the
transients, not the hotels and motels, paid the tax; the hotels and motels merely
collected the tax. The court continued that “It is a well-settled principle in Tennessee
that a party lacks standing to challenge a tax unless that party is the taxpayer. Bodine v.
Torrence, 545 S.W.2d 743, 7444 (Tenn. 1977). This follows from the fact that one who is
not the party against whom a given tax assessment is assessed, does not sustain an
injury distinct and palpable from the general population with respect to that tax…” [At
239]
- However, the group of plaintiffs in this case who were patrons of the hotels
and motels who had actually paid the hotel-motel tax, were entitled to make
constitutional challenges to the exemptions. Those constitutional challenges were
under Article I, § 8 and Article XI, § 8 of the Tennessee Constitution. Article 1, § 8
requires the equal protection of the laws, and Article XI, § 8 prohibits the passage of
laws that are not general in scope.
The court held that the trial court had applied the correct rule for measuring the
constitutionality of the hotel-motel tax exemptions under Tennessee Code Annotated, S
67-4-1425(c) and (d):
[T]he Court finds that the exemptions provided in subsections (c) and
(d) are based upon reasonable classifications and are not capricious,
unreasonable, or arbitrary; accordingly. § 67-4-1425(c) and (d) do not
violate either Article 1, Section 8 or Article XI, Section 8 of the
Tennessee Constitution. The Court finds that the defendants have
presented many possible goals of the Legislature, which may have
reasonably been the impetus for enacting the provisions in question and
which are sufficient to justify the challenged classifications. [At 240]]
Said the court about the trial court’s ruling: “We note…that the proper standard
of review to be used in analyzing the constitutionality of a tax statute is the rational
basis standard. [Citations omitted by me.] In the context of legislation containing
particular classifications, such as the tax exemptions at issue, our supreme court has
held that the rational basis standard means that “[i]f any possible reason can be
conceived to justify the classification, or if the reasonableness be fairly debatable,” then
the legislation will not be struck down. Estrin v. Moss, 221 Tenn. 657, 430 S.W.2d 345,
349 (1968). [At 240]
Finally, concluded the court: “It is also well-settled that “[the]right to tax is
essential to the existence of government, and is particularly a matter for the Legislature,
and the legislative power in this respect can only be restrained by a distinct and positive
expression in the fundamental law...” As such, any plaintiff seeking to challenge the
constitutionality of a tax statute bears a heavy burden.” [At 240]
There had been ample proof that in the counties that were the subject of
exemptions contained in Tennessee Code Annotated, § 6-4-1425(c) and (d) had
experienced “rapid and substantial population growth over the past few decades. This
growth, according to the plaintiff’s experts, has produced different and greater burdens
on these counties to provide for streets, school, police and fire protection and other
county and municipal services. It is this increased burden that necessitates greater tax
revenues and justifies the exemption allowing double-taxation in Shelby, Williamson
and Rutherford Counties.” [ At 241]
It is extremely important here to understand the facts of the hotel-motel taxes that were at
issue in Shelby County in Admiralty Suites. (I have not looked closely at the hotel-motel taxes that were
at issue in Williamson and Rutherford Counties in that case, but they were obviously combined countycity taxes). As the Court itself said above, “At the time of the enactment of § 67-4-1425(c), Shelby
County had in existence a county-wide 5% hotel tax, which remains in effect ....” As the Court also
noted, the tax authorized by the private acts and the ordinances adopted by the Cities of Germantown,
Collierville and Bartlett, was 5%. That put the total city-county hotel-motel tax at 10%! The court upheld
the population brackets at issue in that case, the obvious effect of which was to uphold the combined
10% county-city hotel-motel tax in Shelby County, and whatever the combined county-city hotel-motel
tax was in Williamson and Rutherford Counties. Presumably, the combined county-city hotel-motel
taxes in the latter two counties at issue was probably over 5%.
But equally important to note is that it is not altogether clear that the City can stand in the same
legal shoes as did the cities in Shelby County and Williamson and Rutherford County, that were involved
in Admiralty Suites, above, with respect to the prohibition against the passage of legislation that is not
general in scope, under Article XI, § 8 of the Tennessee Constitution. The court in that case would
uphold the tax if any reason could be found to support it, and defendant challenging a tax statute bear a
heavy burden. But it may be that the need for small cities such as yours for revenues to promote
tourism may be as compelling to a court as the need for cities that have experienced a lot of growth for
revenues to provide infrastructure.
That brings us to a Tennessee case that arguably stands for the proposition that the expenditure
of the hotel-motel tax to light the interstate inside the city won’t pass legal muster. In Smith v. City of
Pigeon Forge, 600 S.W.2d 231 (Tenn. 1980), the Tennessee Supreme Court held that a city privilege tax
of one percent levied upon the gross receipts of all Pigeon Forge businesses was unconstitutional. The
tax was levied under the authority of a Public Acts 1976, Chapter 808, and levied by Ordinance 143,
which directed that the tax be allocated 25% to the general fund and 75% “so as to be directly or
indirectly beneficial to the business community and tourism in general.” [At 232]
The court held the tax violated the “public purpose” doctrine in Article II, § 29 of the Tennessee
Constitution. The court distinguished from Smith v. City of Pigeon Forge, earlier cases in which public
expenditures were held not to violate the public purpose doctrine, “where the expenditures were
authorized pursuant to clearly expressed public policy of the State, responsive to a declared crisis and
with standards and checks to be exercised by public officials upon the use of the funds….” The express
language of Pigeon Forge Ordinance 143 mandates the use of seventy-five percent of the tax revenue
for the benefit of the business community and tourism, leaving the public at large with only the remote
hope that it may derive some incidental benefit from the promotion of private business enterprises
wherein neither of its representatives have any participation in management or profits. [At 233]
The difference between the public act and ordinance at issue in Smith v. City of Pigeon Forge
and the private act at issue in the City’s case, is that the tax in the latter is being levied under a
Tennessee statutory scheme authorizing municipalities to levy a hotel-motel tax, which taxing scheme,
as pointed out above was upheld, at least as to the fast –growing cities in Admiralty Suites and Inns, and
that taxing scheme contains no standards governing for what purposes the tax can be spent.
I am not sure what the outcome of Smith v. City of Pigeon Forge would have been had the city
ordinance in that case contained some standards for the expenditure of revenues from the tax. But
that question brings me to an important aspect of the public purpose doctrine: it changes with the
times. Over 30 years have passed since Smith v. City of Pigeon Forge was handed down and
governments at every level are facing dire economic circumstances. It appears to me that perhaps
because of those economic conditions, some financial expenditures of municipalities that might not
have held constitutional muster years ago may fare better today. Ragsdale v. city of Memphis, 70
S.W.3d 56 (Ct. App. Tenn. 2001), exemplifies that change, the court declaring that:
State constitutions embody fundamental values and articulate
the citizens’ common aspirations for constitutional governance
and the rule of law. Rather than stating inflexible specific rules
of conduct, they contain broad principles capable of
accommodating societal changes. [Citation omitted by me.]
Constitutional provisions gather meaning from the experience
of the people. [Citation omitted by me.] The courts should
expect that modern society will mold and shape constitutional
principles into new and useful forms. [At 64]
There the court upheld a large investment by the City of Memphis and Shelby County in the
construction of a sports stadium by the Sports Authority, an entity created by the city and the county.
That case makes much of the fact that it was the sports authority rather than the city and county,
issuing, and being responsible for, the debt for the stadium. But the reason for the court’s emphasis on
that fact was to answer the allegation that the arrangement violated Article II, Section 29 of the
Tennessee Constitution, which prohibits municipalities from lending their credit, without a referendum.
But Ragsdale v. City of Memphis, also points to the proposition that where a municipality
finances a project with accumulated revenues, there is no issuing of credit, citing Copley v. County of
Fentress, 490S.W.2d 164 (Ct. App. Tenn. 1973). There, the question was whether the county could build
an industrial building without running afoul of the “lending of credit” prohibition of Article II, Section 29
of the Tennessee Constitution. The county had allocated $105,000 from the general fund that had been
allocated over a period of years to an industrial fund, to build an industrial building. The court declared
that “[W]e do not agree that the challenged action of the County Court constitutes giving or ending of
credit of said County for any illegal purpose in view of the uncontroverted fact that the County is not
borrowing any money for such purpose.” [At 168]
The philosophy behind Copley’s interpretation of Article II, Section 29, was that:
This court will take judicial notice of the change in the
agricultural economy of this section of the country due in large
measure to the mechanization of farm operations, thus causing
the country people to move to the town and cities where work
is available and, if work is not available in those places within
the State, then the migration occurs to other states, principally
where industrial jobs and a weekly payroll are available. [At
167]
But Article II, Section 29 also includes a “public purpose requirement” for the raising and
spending of tax money. In addition, Tennessee Code Annotated, § 6-56-112 requires that all public
expenditures be supported with a lawful public purpose. It seems clear that the promotion of tourism
reflects a public purpose today and presumably would have under Smith v. Pigeon Forge, if either the
private act and/or ordinance in that case had had standards governing the expenditures generated by
the tax.
Does “tourism” involve the lighting of interstates or highways?
I can find no Tennessee cases or statutes defining that term “tourism,” and I can find no cases in
the United States dealing with the question of whether tourism can include lighting of interstates and
highways. Even the legislation establishing the Tennessee Tourism Department [Tennessee Code
Annotated, § 4-33-2201] does not define “tourism.” The 2011 legislation adopting the Border Region
Retail Tourism Development District Act defines “Extraordinary retail or tourism facility,” [Tennessee
Code Annotated, § 7-40103(7)], but that whole statutory scheme appears to envision relatively large
commercial and/or “tourism” facilities. The case of Fountain Place Cinema 8, LLC v. Morris, 707 S.E.2d
659 (W.Va. 2011) used the simple expedient of turning to the dictionary to find a definition of
“destination-oriented recreation and regulation.” Citing several dictionary definitions, the court defined
“tourism” within the meaning of that statute as
“The business or industry of providing information, accommodations,
transportation or other services” to a person who is travelling,
especially for pleasure. Put another way, “tourism” is the business of
attracting tourists”—people who “travel [] for pleasure or culture.” –
and “providing for their accommodation and entertainment [.]” [At
864] [Webster’s New Collegiate Dictionary 7 (199); Random House
Webster’s Unabridged Dictionary, page 2002; XVIII Oxford English
Dictionary 306.]
Webster’s Third New International Dictionary (unabridged) (1986), defines “tourism” as “The
guidance or management of tourists as a business or a governmental function: provision of itineraries,
guidance, and accommodations for tourists: the economic activities associated with and dependent
upon tourists.”
It is common for the Tennessee courts to also use dictionary definitions of words.
Either of those definitions appears broad enough to make the interstate or highway passing
through a municipality a bright and inviting place for tourists to stop and spend their accommodations
and meal dollars a desirable function of “tourism” within the meaning of the statute giving the City the
authority to levy a hotel-motel tax solely for the purpose of tourism.