Oct. 17, 2014 – Condo owners who did not rent their units to the public paid a “fee in lieu of room” tax to the City of Delevan. Recently, a state appeals court ruled that the fee constituted an illegal tax and the condo owners were not required to pay it.

The developer of Lake Lawn Resort Condominium and the city had entered an agreement whereby any condo owner who did not rent to the public would pay a minimum of $250 per month in lieu of room taxes that would have accrued it rented.

Six owners had notice of the declaration before purchasing the units. They paid the fee but sued the city and the condo association, which collected the fee on behalf of the city, arguing that the fee constituted an illegal tax and they were entitled to a refund.

The city said the fee was the product of an enforceable contract and was not an illegal tax. The circuit court ruled in favor of the city, concluding that the owners “specifically contracted to pay the fee,” which serves as a back-up to lost room taxes.

But in Bentivenga et al. v. City of Develan, 2014AP137 (Oct. 15, 2014), a three-judge panel for the District II Court of Appeals ruled the fee was an illegal tax and reversed.

“A ‘fee’ imposed purely for revenue purposes is invalid absent permission from the state to the municipality to exact such a fee,” wrote Judge Paul Reilly, noting the city had no authority to impose the fee. “We find that the City’s ‘fee in lieu of room tax’ is a tax.”

The panel rejected Delevan’s argument that the fee was a contractual penalty that was bargained between the city and the condo developer.

[T]he ‘fee in lieu of room tax is not placed on the Developer, but on unit owners who were not parties to the development agreement, and continues in perpetuity at the City’s discretion,” Judge Reilly explained. “The revenue is not designated for any development-related purpose but to go into the City’s general fund.”

The fee is a revenue generator, the panel explained, and the city did not have authority to impose it against a certain class of residents without legislative permission.