Court Opinion

ID: 4963450
Source: CourtListenerOpinion
Date Created: 2021-09-24 15:27:45.356534+00
Date Added: 2024-06-11T08:15:57.610811
License: Public Domain

DISSENTING OPINION BY
Judge SMITH-RIBNER.
I respectfully dissent because I conclude that Appellants Kelly M. and Demaris L. Edwards et al. (hereafter “Hoteliers”) are correct that the hotel room rental tax (Hotel Tax) provision of the Third Class County Convention Center Authority Act (Alternative Provision), Act of August 9, 1955, P.L. 323, as amended, added by Section 2 of the Act of October 18, 2000, P.L. 541, 16 P.S. §§ 2399.51-2399.73(Act), is unconstitutional as applied to them under the circumstances of this case and that the Court of Common Pleas erred in evaluating the evidence regarding burdens and benefits resulting from the publicly funded luxury host hotel as an integral part of the convention center development. The evidence submitted by Appellees Erie County Con*1005vention Center Authority et al. (Authority) demonstrates that the burden imposed on the Hoteliers by this tax is palpably disproportionate to any benefit that they received.
First, I agree with the Hoteliers that the fact that the Hotel Tax is available to fund construction and operation of a competing hotel is a crucial distinction from other cases. The original conception of the current Act and of the initial version enacted in 19941 was straightforward and eminently sensible. Convention centers, if they are successful, attract conventions. Conventions are attended by conventioneers, many or even all of whom are from outside the immediate area and who therefore require hotel accommodations in order to attend. This increased demand for hotel rooms is one of the principal economic benefits that flow from the creation of a convention center, and it justifies a presumption, indeed a legislative finding, that the convention center will benefit the local hotel industry.2 The presumption in turn justifies imposing a hotel room rental tax to assist in financing the project. This construct is stood on its head when a publicly funded luxury hotel is created as an integral part of the convention center project.
As the majority acknowledges, Pennsylvania law recognizes that a hotel room rental tax may be constitutionally unsound in particular circumstances. In Allegheny County v. Monzo, 509 Pa. 26, 500 A.2d 1096 (1985), the owner of a hotel on the outskirts of Allegheny County challenged the one percent hotel room rental tax imposed county-wide to finance the construction of a convention center in Pittsburgh under Section 1970.2 of the Second Class County Code, Act of July 28, 1953, P.L. 723, as amended, added by Section 1 of the Act of December 16, 1977, P.L. 323, 16 P.S. § 4970.2. The hotel owner argued that a convention center in downtown Pittsburgh would benefit nearby hotels to a great degree, but it would not benefit those farther away, such as his.
The Supreme Court stated: “Where the benefit received and the burden imposed is palpably disproportionate, a tax is not only a taking without due process under the Fourteenth Amendment to the United States Constitution, but also an arbitrary form of classification in violation of equal protection and state uniformity standards.” Monzo, 509 Pa. at 38, 500 A.2d at 1102. Further, the court explained that hotels in surrounding municipalities were required to collect and pay a tax that provided no benefit to that portion of the class but that enabled Pittsburgh hotels and businesses near the convention center to benefit immeasurably, stating that the owner’s hotel “in essence, is being required to finance its competition.” Id. at 42, 500 A.2d at 1104. The court held that under those circumstances the tax violated the requirement of Article VIII, Section 1 of the Pennsylvania Constitution that taxes “be uniform upon the same class of subjects.... ”
The Hoteliers emphasize that this case is the first in a line of cases beginning with Monzo involving challenges to hotel room rental taxes that includes a publicly funded and publicly owned host hotel that is to be constructed as an integral part of the pro*1006ject in which the convention center is built. Further, this is the first case to consider the amendment to the definition of “convention center” or “convention center facility” in Sections 2399.53 and 2399.72(k) of the Act, 16 P.S. §§ 2399.53 and 2399.72(k), by Section 2 of the Act of November 29, 2004, P.L. 1275 (Act 155), to add the word “hotels” to a definition that plainly did not include hotels as parts of convention centers previously.3 The majority refers to this amendment but does not mention the fact that the Authority sought and secured it in the course of arranging for bonds backed by Erie County to finance the construction of the convention center and the hotel.
The effect of the amendment is to permit money collected through the Hotel Tax authorized by the Act to be available for any aspect of the construction or operation of the Host Hotel as well as the convention center, including debt service and operational expenses. Curiously, the Authority asserts that it has a policy of not using Hotel Tax revenues for such hotel purposes (and that Hotel Tax revenues used for initial “soft” costs including design charges were repaid as soon as the bonds were issued), as if the Authority is aware of the inherent unfairness of taxing an existing hotel to finance construction and operation of a competing hotel. The Act, as amended, however, requires no such restraint.
The recent case of Bold Corp. v. County of Lancaster, 569 Pa. 107, 801 A.2d 469 (2002), was somewhat similar to the present case in that a host hotel was to be built along with the convention center, with the distinction that the hotel was to be privately financed and owned. As the majority notes, the Supreme Court quoted the trial court’s opinion at length:
The plaintiffs complain that the Court dismissed the general effect of the hotel portion of the project as merely capitalism at work. This, however, is not the Court’s position, which was better articulated during the oral argument on this issue. The Court is satisfied that the connection between the convention center and the adjoining hotel is so quid pro quo that each must be considered in the benefit/burden analysis. However, the hotel is only relevant to the extent that it takes away any benefit from the plaintiffs that would be derived from the convention center. In other words, the convention center will not be built without the hotel, and vice-versa. If the hotel were to take any and all benefit from the convention center leaving nothing for the other Lancaster County hoteliers, that would appear to be a funding of competition in that a benefit would be created for one, through a tax on all. See generally [Monzo]. To the extent that there are room nights put back into the market above and beyond this absorption of the convention center busi*1007ness, that is merely capitalism at work. Even though the hotel will not come without the convention center, the hotel is not to be funded with public monies. Thus, the plaintiffs are not funding the hotel that will adjoin the proposed convention center. The added competition to the market as a whole is not a concern of the Court, and neither is it relevant to this issue, as the addition of rooms to the market is no different than if any private hotel were to be built in downtown Lancaster. The only relevant burden this hotel will have is the extent to which it takes away the benefits of the convention center from the other Lancaster County hotels.
Id., 569 Pa. at 118, 801 A.2d at 475 (quoting Trial Court slip op. at 11) (second emphasis added). The majority concludes that the fact that the host hotel was not funded by the tax on the hoteliers was not the determinative factor; rather, the inquiry focused on whether the hotel would absorb all of the additional room nights.
The language emphasized above plainly indicates that the reason that the court could consider the extent to which the host hotel would take away the benefits of the convention center as the “only relevant burden” and why the host hotel there was “no different than if any private hotel were to be built in downtown Lancaster” was precisely because the hotel was not being financed by the proceeds of the hotel room rental tax. In the present case the collection of the Hotel Tax from the Hoteliers and making that money available for funding all aspects of the competing Host Hotel must be considered as part of the “relevant burden” on the Hoteliers, as well as the adverse impact that the operation of the Host Hotel is conceded to have on the Hoteliers’ business. Further, the fact that the Hoteliers are being required to fund a competing hotel as part of this project necessarily undercuts the finding in Section 2399.52(a)(5) of the Act that the development of the convention center will provide benefits to the hotel industry. The trial court’s opinion relied heavily on this finding, which has been altered by Act 155.
The second aspect of the burden imposed is the extent, if any, to which the Host Hotel will draw business away from the existing hotels. The trial court stated that neither side presented compelling support for its position; however, on balance, the court found the testimony of the Authority’s witnesses Warren Marr and Robert Canton, both of Prieewaterhouse-Coopers, and Charles H. Johnson, real estate development consultant, to be more grounded in fact than supposition and their conclusions to be the result of a more comprehensive, well-reasoned and objective analysis. The Authority’s witnesses and the Authority’s argument focus on increase in demand for hotel rooms resulting from the construction of the convention center and, according to Marr, from the construction of the Host Hotel, which, as a new luxury hotel in this market would generate its own demand of 5000 additional room nights per year.
Marr testified that he believed that the convention center would generate between 24,000 and 32,000 room nights per year within five years of opening, of which 50 percent would be accommodated by the Host Hotel and 50 percent by other hotels. Net occupancy would decline from 68 percent to 65 percent in 2008, but then recover. By 2011, he opined, the convention center and hotel complex would reach “stabilization,” and any detrimental effect on local occupancy rates within the hotel’s competitive market segment would have dissipated, i.e., the overall occupancy rate would return to 68 percent. Further, there would be benefits for the community at large due to construction spending, the *1008economic impact of many new visitors and additional revenue for the work of the Convention and Visitors Bureau (CVB). Johnson testified that stabilization would occur after six years and that by then the convention center would generate between 18,000 and 35,000 additional room nights per year.
The majority quotes Marr’s testimony stating that his projections were that there might be an initial adverse impact on the average daily rate (ADR) charged by other hotels in the competitive set for a year or two but no prolonged effect and that the ADR would increase through the 2011 year of stabilization. N.T., February 3, 2006, pp., 116-117; Reproduced Record (R.R.) 879a-880a. Similarly, he stated that the introduction of the Host Hotel would result in initial harm to the occupancy rates of the hotels in the competitive set, but that again it would “stabilize out” in a couple of years and there would be no long-term impact. Id. at 117; R.R. 880a. In concluding that the testimony negated the Hoteliers’ theory of undue economic burden based on unfair market competition from the Host Hotel, the majority simply accepts that several years of admitted adverse effects on rates and occupancy levels of competitive hotels are of no significance.
The Hoteliers focus on the competitive effect of increased supply of high-end but moderately priced rooms. They calculate that to achieve a 68 percent occupancy rate, the Host Hotel will need to capture 31,820 room nights from existing businesses. Even assuming that Marr and Canton are correct that other hotels will receive 13,500 new room nights, there is still a net loss of 18,320 room nights, or over $1,600,000 annually, which they assert is a “palpable” burden. The Authority does not fully agree with the calculation, but it acknowledges a harmful effect. Further, the Hoteliers point out that Marr’s testimony was based on an assumption that there would be no other new sources of supply, ie., new hotels, for seven years, but it was announced during trial that another new hotel was to be built in Erie County.
Robert J. O’Malley, the Authority’s Executive Director, acknowledged that the cost of money is less for a tax-exempt entity, N.T., February 2, 2006, p. 71; R.R. 538a, and that an authority-owned hotel is able to moderate prices because its only objective is to cover debt service and to maintain the facility, not to maximize profits, id. at p. 75; R.R. 542a. These represent permanent competitive advantages that will be enjoyed by the Host Hotel. As for the Authority’s “policy” of not using Hotel Tax money to support the operations of the Host Hotel, the Hoteliers note that policies may change and that it is unrealistic to expect that the Authority would not use this money for hotel debt service if the hotel’s earnings declined. Such a change in policy is highly likely, if needed, in view of the Authority’s efforts in securing the adoption of Act 155.
Arrayed against this evidence of burden is the largely speculative evidence of possible benefit to the Hoteliers. Marr’s testimony quoted by the majority speaks only of an eventual return to the 68 percent occupancy rate that he said would exist if no convention center were built; it does not claim higher future occupancy levels. Although he stated that more rooms would be sold after stabilization, that is a given in view of the addition of new rooms to the market; he did not state or imply that the Hoteliers would sell more rooms than before. The trial court accepted that additional revenue to the CVB improved its position to meet its objectives and to enhance business for the entire County hotel industry; however, the Hoteliers do not *1009challenge the 20 percent of the Hotel Tax that is dedicated to the CVB.4
Finally, I agree that the trial court erred in considering benefits to the community in general as part of the benefit/burden analysis. As they note, the trial court’s supplemental opinion stated that Marr’s “forecast with regard to a temporary adverse effect in the overall hotel market must be seen in the context of the larger picture regarding the impact of the convention center on the Erie County community.” Trial Court Supplemental Opinion, p. 5. It listed factors including a direct economic impact of $64,000,000 in construction costs, the addition of 780 employees, the prospect of many new visitors and secondary impacts such as downtown revitalization. As the majority notes, the Supreme Court explained in Monzo that because the hotel tax did not qualify as one for general public use, such as taxes imposed for the benefit of public schools, the general rule that a challenger cannot prevail on the ground that he or she receives no benefit does not apply. As the Hoteliers stress, the court stated that “in classifying persons for taxation, there is an obligation on the part of the taxing power to make available some benefit to those taxed” Monzo, 509 Pa. at 39-40, 500 A.2d at 1103 (emphasis added).
None of the several cases that have considered the question of the legitimacy of a hotel rental room tax has considered benefit to the community as a whole as a part of the benefit/burden analysis. See, e.g., Bold Corp.; Leventhal v. City of Philadelphia, 518 Pa. 233, 542 A.2d 1328 (1988). The reason, I conclude, is obvious: the community as a whole is not being asked to pay the tax. Rather, a narrow classification of hoteliers is being required to assess the tax on patrons and to pay the tax. The consideration of benefits and burdens must be limited to the effect on those subject to the tax.
In conclusion, I agree with the Hoteliers that the fact that this case involves a publicly funded and publicly owned Host Hotel, with access to Hotel Tax revenues permitted by Act 155, at a minimum invalidates that legislative finding that a new convention center will benefit the county hotel industry. I think that the Hoteliers have demonstrated a substantial burden from the tax, palpably disproportionate to any proposed benefit and sufficient to require invalidation of the tax as applied to them. Accordingly, I dissent from the majority’s decision and would reverse the order of the trial court.

. The Third Class County Convention Center Authority Act, Act of December 27, 1994, P.L. 1375, formerly 16 P.S. §§ 13101-13124, repealed by Section 4 of the Act of November 3, 1999, P.L. 461.

. See Section 2399.52 of the Act, which states in part: “(a) It is hereby determined and declared as a matter of legislative finding: ... (5) That the development of a convention center will provide benefits to the hotel industry throughout the entire area of the county where the center is developed.”

. The definitions in both sections provide in relevant part, with added emphasis:
"Convention center” or "convention center facility” shall mean any land, improvement, structure, building, or part thereof, or property interest therein, whether owned by or leased by or to or otherwise acquired by an authority, appropriate for any of the following: large public assemblies, the holding of conventions, conferences, trade exhibitions and other business, social, cultural, scientific, sports, recreational, artistic and public interest events, performances and exhibitions, and all facilities, furniture, fixtures and equipment necessary or incident thereto, including hotels, meeting rooms, dining rooms, kitchens, ballrooms, reception areas, registration and prefunction areas, locker rooms, practice areas and equipment, training areas and equipment, truck loading areas ... and also including other land, buildings, structures or facilities for use or planned for use in conjunction with the foregoing....

. The Hoteliers have stated repeatedly that they do not challenge the 20 percent of the Hotel Tax that is dedicated to the CVB, and each count of the Second Amended Complaint states a request for relief including an order to the City and County of Erie to make restitution to Hoteliers “in the form of a refund of 80% of all Hotel Room Excise Taxes collected from them by the County.” Second Amended Complaint in Equity and Action for Declaratory Judgment, ¶¶ 114, 116, 122 and 124; R.R. 1020a, 1022a, 1023a and 1025a. Cases are clear that where a controversy involves a challenge to the constitutional validity of a taxing statute or ordinance, such a controversy falls within the general class of cases where equity has jurisdiction and competence to act. Studio Theaters, Inc. v. Washington, 418 Pa. 73, 209 A.2d 802 (1965). Further, once its jurisdiction has been established, equity may fashion relief as justice and good conscience dictate. Tredyffrin-Easttown School District v. Valley Forge Music Fair, Inc., 156 Pa.Cmwlth. 178, 627 A.2d 814 (1993).