Local Motels Ask Courts to Tax Condo Rentals

WILDWOOD CREST — Local motel owners are unhappy with a recent appellate decision that is keeping local condominium owners from collecting taxes from tourists who rent their homes. But the owners have hope that state tax officials will listen to judicial suggestions and change that policy, which, they say, is unconstitutional and gives an unfair business advantage to the condo owners.
On Thur., Aug. 26, a state appeals panel affirmed a decision made last summer by a Tax Court judge who said he did not have the authority to force the state Division of Taxation to change its regulations regarding the collection of sales and occupancy taxes by condo and “condotel” owners.
Steve Tecco, president of the Greater Wildwood Hotel Motel Association, the group that filed the lawsuit against the state, told the Herald his group was “frustrated and very disappointed by the decision.”
“We feel like we never had our day in court,” he said, noting that the judges just decided that they couldn’t decide the matter.
Tecco, whose family owns the Armada Motel in Wildwood Crest, said in recent years many former hotels have been renovated into condotels, with individually-owned units, or replaced entirely by new condominiums, that continue to rent to visitors on a daily, weekly or monthly basis.
State law defines a hotel as “a building or portion thereof, which is regularly used and kept open as such for the purpose of furnishing sleeping accommodations and related services for pay to tourists, transients, or travelers.”
Those buildings include: apartment hotel, bed and breakfast, motel, inn, tourist home, tourist house or court, tourist cabin and club, and a boarding house or rooming house containing eight or more units or any other building or group of buildings in which sleeping accommodations are normally available to the public on a transient basis.
“The only difference is the between them and us is the form of ownership,” Tecco said. “And the form of ownership should neither qualify nor disqualify properties from paying these taxes. Usage should determine qualification for taxation.”
Not only is the system unfair, but it also costs the state a lot of money, Tecco said.
Tecco noted that a state marketing firm estimated the loss of revenue from not taxing second home seasonal rentals was in excess of $345 million annually.
“If even a tenth of that sum was invested in tourism, our meager tourism budget would be tripled,” Tecco said, noting that the cities of Philadelphia and Ocean City, Md spend more on tourism individually than the entire state of New Jersey.
Before the tax court, the motel association was hoping that the judge would find the tax division’s rules unfair and force it to include condominiums in the tax. It made a motion to that effect.
The judge found that the association did have a case against the Division of Taxation, noting that the distinction made by the division between motels and condotels “logically creates a competitive disadvantage for the members of the plaintiff association vis a vis owners of condotels and other title holders of property which compete with the members of the plaintiff association.”
Despite the judge’s apparent view in favor of the motel association, he refused to force the tax division to change its rules.
“I conclude that I lack jurisdiction to declare the tax applicable to an infinite number of properties,” the judge’s decision stated. “Each property has a unique factual form of ownership and method of operations. Without having a fuller record concerning the nature of the specific competitor and without giving that competitor an opportunity to be heard, I cannot declare to whom the tax applies.”
The judge denied the motel association’s motion, but made it clear that he wanted the Division of Taxation to clarify its rules.
“I strongly urge the Director (of Taxation) to issue a more definitive rule, and in the rule-making process, to hear the conflicting arguments of the competing private parties,” the judge stated.
After that judgment and before its recent appeal, the association filed a petition urging the Director to adopt a rule expanding the regulatory definition of the term “hotel” to include “unconventional” transient rentals such as condotels. The petition was denied on Jan. 4 this year.
But according to court documents, in the denial the Director acknowledged that the “manner in which the hotel industry operates has evolved over time.” For that reason, the Director stated, the Division “is currently drafting a regulatory proposal that it plans to publish shortly.”
“To date, that proposal has not been promulgated,” the appellate decision stated.
In its review of the case, the appellate judges noted that “we are satisfied that the Tax Court judge was correct in his position that he lacked jurisdiction to afford the Association the relief that it sought in this matter.”
The judges said the association should have taken this matter up with a different court.
“The Tax Court lacks jurisdiction to adjudicate the validity of policies or to order the Director to modify his policies in a particular fashion so as to impose a burden on an unrepresented class,” the opinion state. “We thus find that this matter should have been instituted in the Superior Court, which could then have transferred it to the Tax Court…if it had chosen to do so.”
The matter also could have been appealed following the Taxation Director’s denial of the association’s petition for a rule change.
“However, the Association failed to follow either course,” the appeals judges concluded, but not without a plea to the tax division. “As a consequence, we affirm the dismissal of this action, but not without echoing the plea of the Tax Court judge that the issues raised herein be addressed through rulemaking.”
In the meantime, state Treasury Department is considering the issue.
“The Division of Taxation is currently developing a new rule that will define what type of establishment is a hotel for the purposes of the state’s sales and occupancy taxes,” said Bill Quinn, a Treasury spokesperson. “The rulemaking process will include publication of the new proposed rule and a 60-day period for public comment on it.”
Contact Hart at (609) 886-8600 Ext 35 or at: jhart@cmcherald.com