Wisconsin's Court of Appeals Rejects Municipality's "Fee in Lieu of Room Tax"

Nothing in life might be certain but death and taxes, but a recent decision from Wisconsin’s court of appeals turned out to be an exception to that rule. In Bentivenga v. City of Delavan, No. 2014AP137 (Ct. App. Oct. 15, 2014), District II held that the City of Delavan could not require certain condominium owners to pay what the city called a “fee in lieu of room tax” on units that they owned but chose not to rent out to the public.

Taxing authorities often are loath to give up potential revenue, particularly since so many have seen their tax rolls decline in recent years. So when the developer built the Lodges at Lake Lawn Resort Condominium, the city required the developer to enter into an agreement that any owner of a condominium who chose not to rent the unit to the public would pay a fee to the city “in lieu of the room tax which the City would have otherwise received from the rental of such Unit to the public.” The base fee was $250 per month, with future increases tied to measures of inflation. The purchasers of condos were told of the agreement and that the condo association would collect the fee and forward it to the city. Nevertheless, the owners who chose not to rent their units to the public and paid the fee then sued the city and the condominium association, asking for a refund and arguing that the fee was illegal. The circuit court ruled for the city. 

But the court of appeals reversed. In a seven-page opinion written by Judge Reilly (and joined by Chief Judge Brown and Judge Neubauer), the court held that the fee was an illegal tax and not a contractual penalty, as the city argued. The problem for Delavan is that to levy a tax, which the court defined as an “enforced proportional contribution[] from persons and property levied to support a government and its needs,” requires statutory or constitutional authorization. Without that authority, it’s illegal and invalid.

Delavan conceded that it lacked authority, but it argued that it was capable of bargaining for this sort of contractual fee in its proprietary capacity, likening its case to an earlier unpublished decision of the court of appeals that allowed a municipality to impose a liquidated-damages penalty on a developer for not meeting certain development goals. In that case the municipality had financed improvements for the developer, so the penalty was a means by which it could recoup its expenditures.

That wasn’t the case here. Delavan’s agreement with the developer had such a provision that let the city recoup its investment from the developer, but the “fee in lieu of room tax,” in contrast, was imposed in perpetuity and was levied on the unit owners, not the developer (the actual party to the development agreement). The court held that it was nothing more than a tax cloaked as a contractual fee. And, as a tax levied without authority, it was illegal.