Court of Appeals Finds Fee in Lieu of Room Tax Constitutes an Illegal Tax
The Wisconsin Court of Appeals (District II) recently held that a fee in lieu of room tax charged by the City of Delavan to owners of units in the Lodges at Lake Lawn Resort Condominium was an illegal tax. The fee was charged to unit owners who chose not to rent their units to the public, beginning at a $250 base fee and providing for future increases. The provision allowing for the fee was included in the development agreement between the City and the property developer, but owners had notice of the provision before buying their units. Unit owners who chose not to rent their units paid the fees and then sued the City, claiming the fee was an illegal tax. There were cross motions for summary judgment. The trial court granted summary judgment in favor of the City, finding the owners had agreed by contract to pay the fee and that the City had legitimate reason for the fee in that it provided a method to recover for any decrease in taxes as a result of the units not being rented.
The court of appeals reversed, finding the fee was an illegal tax. The court focused on the purpose of the “fee”, which was to generate revenue for the City, not to cover the cost of any service or regulation. The court highlighted the fact that the fee was specifically created to counteract the loss of a room tax the City would otherwise have been able to recover had the units been rented to the public. Contrary to the City’s position, the court found that the fee was not a contractual penalty because it did not allow the City to recover for losses from its investment in the development. In fact, the court noted the development contract had another provision with this purpose. Further, the court pointed out that the fee was charged not to the developer, but to the individual unit owners, and served solely to recoveramounts the City had hoped to receive through taxation. Thus, while the charge was labeled a “fee,” it was actually a tax. The court of appeals remanded the case for further proceedings consistent with its decision. The case is Bentivenga et al. v. City of Delavan et al., 2014AP137 (Recommended for Publication).
This case again reminds us that how fees or other charges arenamed is not always dispositive. Municipalities must be mindful of thestated purpose and effect of similar fees or charges as this will likely be the driving force in determining enforceability.
