Nearly a year ago, I wrote about the potential impending headache of the Currituck County occupancy tax lawsuit upon many North Carolina destination marketing organizations (DMOs). In late May, the North Carolina Supreme Court ruled in favor of the county, saying that the occupancy tax statute did not categorically bar the county from spending tax revenue on enhanced public safety services that are connected to area tourism. As noted previously, the case was always a bit of a curious one from the perspective of North Carolina DMOs, since Currituck is the only community in the Old North State where a state-mandated tourism development authority (TDA) consists entirely of Currituck’s county commissioners and not representatives from the local visitor economy. (There are a few communities where the investment of occupancy tax funding is directed by a county commission or municipal council.)

That decision of the state’s high court subsequently led to the June introduction of a bill in the NC General Assembly (Senate Bill 484), signed into law by Governor Josh Stein, which placed some restrictions on how occupancy tax revenue can be invested.  This bill barred proceeds from being used for development or construction of a hotel or another transient lodging facility (which was already prohibited by law), and clarified that allowable “tourism-related expenditures” do not include services ordinarily provided by a city for its residents, or for purposes that are designed for or primarily benefit residents of the city unless explicitly authorized by a local act, including all of the following:
a. Solid waste collection or disposal
b. Water supply, distribution, or treatment
c. Fire protection
d. Law enforcement, public safety services, or emergency services
e. Affordable housing
f. Education

(However, Currituck County and the three New Hanover County beach communities of Carolina Beach, Kure Beach, and Wrightsville Beach received something of an exemption to this law via House Bill 240, which defines allowable uses of occupancy tax in those communities to include “services or programs needed due to the impact of tourism and seasonal population changes, such as law enforcement, emergency services, fire protection, construction and maintenance of public facilities, solid waste collection and disposal, and beach nourishment” (which was already an allowable expenditure).  The bill goes on to clarify that “Funds under this subdivision may not be used for services or programs normally provided by
the county on behalf of its citizens unless the services or programs promote tourism and enlarge its economic benefits by enhancing the ability of the county to attract and provide for tourists.” The bill also allocates money for destination promotion.)

North Carolina DMO leaders and boards are not entirely in the clear, however, when it comes to determining what’s an allowable “tourism-related” investment of lodging tax revenue. Senate Bill 484 was simply proscriptive regarding only a handful of potential uses of this revenue. There are still a billion other potential investments of the dollars, and DMO boards will still have to make informed decisions about whether a particular investment meets both the letter and spirit of the law.

Those informed decisions should also include documentation of why the board believes their investment qualifies as “tourism-related.” As noted in a recent opinion piece in the Carolina Journal, one of the concerns cited in both the 2024 Appeals Court ruling (in favor of the plaintiffs) and in a concurring opinion by NC Supreme Court Associate Justice Tamara Barringer was that the Currituck County commissioners did nothing to support their decision “without even a cursory discussion of whether the appropriation was tourism-related.”

DMO boards have the same obligation to their communities and especially their tourism partners as to why anything other than very obvious investments can be legally justified as “tourism-related expenditures.” I’ve seen too many questionable investment decisions made by DMO governing boards without any articulation of how the expenditure benefits the visitor economy, only adding to the lack of transparency that sometimes afflicts DMOs.

The lack of documented justification also creates a slippery slope for DMOs–why is one questionable investment of lodging tax revenue acceptable to the board, but another not unsuitable?

I appreciate that many DMOs love the flexibility of a term like “tourism-related expenditures.” Those words have often enabled them to make tremendous investments that benefit both the visitor economy and the community. But they shouldn’t be abused, either, lest the next piece of related legislation that comes down from Raleigh is more prescriptive (i.e., we’re telling you exactly where you can spend money or how you should spend it) than proscriptive.

Many of the North Carolina destination marketing professionals reading this are likely already aware of the lawsuit filed in 2019 by a group of property owners in Currituck County, NC alleging that county government had misspent more than $40 million in lodging taxes intended for beach nourishment and other “tourism-related” purposes. The plaintiffs lost the original decision, but upon appeal it was overturned by unanimous decision of the state’s Appeals Court in March 2024. The NC Supreme Court has now agreed this summer to hear the county’s appeal, and the county has already filed a brief related to the case.

There are a number of interesting issues raised by this lawsuit, several of which are related to the idea of what is a “tourism-related” expenditure and what isn’t. Since guidelines for North Carolina occupancy tax legislation were first written in 1997 to allow for “tourism-related” expenditures, the phrase has been used to support a variety of investments of lodging taxes in Tar Heel communities, including spending in support of parks, greenways, museums, arenas, sports complexes, wayfinding, and other assets which attract visitors and improve quality of visit and quality of life for residents.

Those investment decisions are typically made at the local level by a tourism development authority (TDA) board, in accordance with the local legislation which dictates how each community can invest its collected occupancy tax revenue. Currituck County is unusual in North Carolina in that its county commission also serves as its TDA. In most places in the state, the TDA is appointed by county commissioners or a city or town council and typically consists of lodging managers or owners and representatives of other tourism-related entities such as restaurants and attractions.

But Currituck County’s 2008 occupancy tax legislation mandates that the Currituck commissioners make these investment decisions. (There are a few communities that have occupancy tax legislation predating the 1997 guidelines where local government decides how the money is spent and there is no TDA.)

Ultimately the Supreme Court’s decision will likely come down to whether the county demonstrated sufficient discretion in its decision to invest some of Currituck’s occupancy tax revenue in emergency services and other local government activities. (It should be noted that the county does have an excellent program of work related to destination promotion, also funded by local occupancy taxes.) And I’m not here to argue whether the county’s investment decisions were justified–that’s going to be determined by the state Supreme Court.

The lawsuit raises two important issues for North Carolina’s destination marketing organizations (DMOs). First, it’s a reminder that local TDAs must justify (and document) their investment decisions in their own “tourism-related” expenditures regardless of the Supreme Court’s decision. As a phrase “tourism-related” provides a lot of cover for TDAs, and most of them respect both the letter and spirit of the law. And many tourism leaders have embraced the flexibility that term offers to make major investments in tourism-related assets that also benefit the community.  But those decisions (and their decisions not to invest in other activities) are also sometimes vague as to their justification as a tourism-related expenditure, leaving a TDA open to second-guessing and potential accusations of a lack of transparency.

The other issue is what happens if the Supreme Court rules in favor of the county. Even given the atypical circumstances of the Currituck County case (where the commissioners exclusively control the $20 million in collected annual occupancy tax revenue and there are specific local issues involved), I expect a decision in favor of the county will have consequences for many DMOs in North Carolina. Faced with sluggish property tax revenue growth and cutbacks in federal spending, many local governments in the state likely eye the growth in occupancy tax revenue and view it as a possible source of new revenue.

With only a few exceptions in NC, occupancy tax revenue does not go to local government general funds. Even in Currituck County, there are legislatively-enacted mandates for how the money can be invested according to its local bill. If the Supreme Court decides against the plaintiffs, TDAs will face much-increased pressure from local elected officials to support local government services such as fire, police, and waste disposal, areas that TDAs have generally avoided. (The few exceptions are found mostly in coastal areas of North Carolina where small beach communities–many with no economic drivers other than tourism–see summer visitation surge, and where the occupancy tax legislation predates the 1997 guidelines.)

This is where an affected DMO (those with the words “tourism-related” in their enabling legislation) must have three elements in place:

1. The aforementioned articulation and documentation of justification for its decisions to invest (and not to invest) in its own tourism-related expenditures;
2. An ongoing program of communication of and advocacy for the benefits of investment in local tourism;
3. And a program of investment in tourism-related assets that benefit both visitors and residents, so the TDA can demonstrate it is sensitive to local needs and that there are many ways of serving the community, but that the organization will remain faithful to both the letter and spirit of the law.

Regardless of what the state Supreme Court decides in the Currituck County example, these are good actions for any DMO to pursue.