An impending headache for some North Carolina destination marketing organizations?

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.