Edwards v. County of Erie

932 A.2d 997, 2007 Pa. Commw. LEXIS 477

Opinions

OPINION BY

President Judge LEADBETTER.¹

A group of hoteliers in Erie County appeal from the order of the Court of Common Pleas that sustained the constitutionality of the Third Class County Convention Center Authority Act (Alternative Provision) (hereinafter referred to as the Act), Act of October 18, 2000, P.L. 541, as amended, 16 P.S. §§ 2399.51-2399.73,² added to The County Code, Act of August 9, 1955, P.L. 323, as amended, 16 P.S. §§ 101-3000.3903, and County Ordinance No. 45-2000, which imposes a hotel room tax as authorized by the Act. Common pleas rejected the hoteliers’ contention that the use of a portion of the tax revenues for the development of a hotel connected to Erie’s convention center imposes an excessive and disproportionate competitive burden on existing hotels. We affirm.

Pursuant to the power enabled by the Act, Erie County established a convention center authority and, by the enactment of Ordinance 45-2000, imposed a 5% room tax for the purpose, in part, of constructing and operating a “convention center facility.”³ In the course of planning for the development of a convention center, the Erie County Convention Center Authority (Authority) determined that the success of the center depended on the construction of a connected hotel and, toward this end, sought to arrange for a privately funded and operated “host hotel.” After a local hotelier limited its plan to a hotel of 133 rooms rather than the minimum 200 rooms deemed necessary by the consulting firm hired by the Authority, the Authority undertook to construct the hotel as a publicly owned and funded facility. Thereafter, the Authority used a portion of the room tax revenues for planning and development of the “host hotel,” which will be owned by the Authority, managed by White Lodging and marketed as a Sheraton. In November 2004, the state legislature amended the Act to specifically include a “hotel” within the definition “convention center” or “convention center facility.” See 16 P.S. § 2399.53. The amendment opened the door to spending a portion of the room tax revenue on the development, construction, financing, operation and management, debt service and promotion and marketing for the host hotel.

In June 2005, the hoteliers filed a declaratory judgment action to invalidate the Act insofar as it included hotels in the definition of “convention center” and, thereby, permitted use of taxes collected pursuant to the county ordinance for the development of a publicly owned and operated convention center “host hotel,” which would harmfully compete with the existing taxed hotel rooms. After the dismissal of two counts on preliminary objections, the hoteliers proceeded to trial without a jury on four counts, asserting that the Act and the ordinance violated the due process clauses of the United States and Pennsylvania Constitutions (Counts I and II), the equal protection clause of the fourteenth amendment of the United States Constitution (Count III), and the equal protection clause in Article I, Section 26 of the Pennsylvania Constitution (Count TV). Before common pleas, the parties agreed that, generally, in order to meet their heavy burden of proving the tax unconstitutional, the hoteliers had to establish that their tax burden was palpably disproportionate to the benefits conveyed. Prior to trial, the hoteliers stipulated that they would not present evidence or argue that the collection of the room tax or its payment by hotel patrons constituted a burden.⁴ Common pleas heard conflicting lay and expert testimony regarding the burden imposed upon the hoteliers as a result of competition from the “host hotel” and concluded that “the evidence presented by the Hotel Group was insufficient to prove that the use of the hotel tax to support the development and operation of the Sheraton host hotel will result in significant financial losses to the members of the group or to the local hotel industry in general.” Based on its findings and following the denial of post-trial motions, common pleas entered judgment in favor of the defendants, Erie County, the City of Erie and the Authority. Thereafter, the hoteliers filed the present appeal.

On appeal, the hoteliers point out that in the series of cases since the mid-1980s, for the most part upholding the constitutionality of hotel room taxes for the development of local convention centers, this is the first one to involve a publicly funded, publicly owned host hotel. See Bold Corp. v. County of Lancaster, 569 Pa. 107, 801 A.2d 469 (2002); Torbik v. Luzerne County, 548 Pa. 230, 696 A.2d 1141 (1997); Leventhal v. Philadelphia, 518 Pa. 233, 542 A.2d 1328 (1988); Allegheny County v. Monzo, 509 Pa. 26, 500 A.2d 1096 (1985) (declaring county hotel room tax ordinance in violation of uniformity clause of state constitution and equal protection clause of federal constitution). They argue that this sets the present case apart from Bold Corp., where our Supreme Court agreed with the trial court that a privately owned and operated convention center hotel is “merely capitalism at work.” The hoteliers further contend that common pleas misperceived the testimony, which they assert established that the Authority’s hotel will take from the hoteliers two “room nights” for every one generated by the presence of the convention center and, thus, will essentially deprive them of the benefit of the new business generated by the convention center meeting facilities. In addition, the hoteliers argue that given its excessive size and scope, the Host Hotel must compete with the Hoteliers for non-convention business if it is to reach the ambitious occupancy projections needed to pay back the $40 million in bond debt. Hoteliers assert that the host hotel will prevail unfairly in the marketplace because subsidies from Erie County give the Authority the unique and unfair ability .to undercut its competition by offering a premium product at below-market prices.

The general legal principles governing a challenge to the constitutionality of a tax statute are well established. A tax enactment is presumed valid and the burden of proving otherwise rests on the challenger. The legislature has wide discretion in matters of taxation but nevertheless is constrained by the requirements of due process and equal protection or uniformity. In Leventhal, our Supreme Court explained:

Both the federal equal protection clause, as applied to taxing statutes, and the state constitutional requirement of uniformity of taxation “upon the same class of subjects” (Pa. Const. Art VIII, § 1) mandate that classification in a taxing scheme have a rational basis. In either case, a classification for tax purposes is valid when it “is based upon some legiti mate distinction between the classes that provides a non-arbitrary and ‘reasonable and just’ basis for the different treatment.” Where there exists no legitimate distinction between the classes, and thus, the tax scheme imposes substantially unequal tax burdens upon persons otherwise similarly situated, the tax is unconstitutional. The controlling standard for determining whether a tax is violative of the Due Process Clause of the Fourteenth Amendment “... is whether the taxing power exerted by the state bears a fiscal relation to protection, opportunities and benefits given by the state. The simple question is whether the state has given anything for which it can ask a return.” 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.

Id. at 239-40, 542 A.2d at 1331-32 (emphasis in original, citations omitted). See also Bold Corp., 569 Pa. at 116, 801 A.2d at 474.

Our Supreme Court applied this test in Monzo to invalidate a hotel room tax imposed on all county hoteliers for the funding of a convention center in Pittsburgh. The Court noted that insofar as the hotel tax did not qualify as one for a 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 receives no direct benefit, does not apply. 509 Pa. at 43, 500 A.2d at 1105. Rather, the Court looked to whether the challenger, a hotelier operating a hotel located near the Allegheny/West-moreland County line, derived a benefit from the use of the tax revenues and concluded that “[t]he burden of the tax is imposed on hotels within the entire county when, in reality, only those hotels and businesses located in or very near downtown (center city) Pittsburgh are benefited.” Id. at 45, 500 A.2d at 1106. The present hoteliers do not base them challenge on any similar geographic inequity; rather, they assert that the host hotel will unfairly benefit from the use of tax revenues.

Applying the benefit/burden test, common pleas found that, while the host hotel will compete for business with the established hoteliers, the increased demand for rooms generated by the convention center as a going concern and by the expected downtown revitalization, as well as the general increase in tourism resulting from promotional marketing conducted with a portion of the tax revenues, will ultimately result in additional business for the benefit of the area hoteliers. On balance, common pleas discerned no palpably disproportionate burden to justify invalidating the tax. In so finding, common pleas resolved conflicts in the expert testimony in favor of the Authority, concluding that while none of the experts presented compelling testimony, those on behalf of the Authority based their opinions on a wider scope of experience and less speculation. Inasmuch as our review cannot revisit common pleas’ assessment as to the weight and credibility of the testimony, we are bound by the findings if the record, considered in the light most favorable to the Authority as the prevailing party, supports them. See Reed v. Dep’t of Transp., 872 A.2d 202, 206 (Pa.Cmwlth.2005). See also Leventhal, 518 Pa. at 243, 542 A.2d at 1333.

The record amply supports common pleas’ findings. Testifying for the Authority, Warren Marr agreed with the hoteliers’ expert, Bruce Walker, that the Erie hotel marketplace has enjoyed “an extremely high level of occupancy ... this is a healthy market.” N.T. January 31, 2006, at 128. R.R. 123a. Marr and Walker agreed that Erie has historically been un-dersupplied with luxury hotel rooms. N.T. February 3, 2006, at 87, R.R. 850A. Walker stated that, in view of the unmet demand in Erie for luxury hotel rooms, new hotels will likely be built in Erie regardless of whether the convention center/host hotel complex is constructed, i.e., the hoteliers will face additional business competition even if the host hotel is not built. Marr opined that the host hotel, as a full service hotel associated with a frequent flier program, would induce additional demand in the Erie market beyond the demand induced by the convention center meeting facilities alone. N.T. February 3, 2006, at 87, 93, R.R. 850a, 856a. Marr agreed that the host hotel would inevitably compete with existing hotels of its class but, even allowing for a minor one-to-four-year drop in occupancy rates during construction and initial operation of the convention facilities and hotel, the general health of the Erie hotel market, along with the increased demand created by the convention center, including its component hotel, and increased demand created by the use of the authorized portion of tax revenues for the general promotion of tourism, would result in a complete rebound by year five to occupancy rates in the plaintiff hotels as strong as prior to the opening of the host hotel. Specifically, after reviewing the basis for his assessment of the Erie hotel market and his projections as to the host hotel’s effect on this market, Marr testified:

Q. From this standpoint, based upon this information and the estimation that you did, the projections that you did, do you have an opinion as to whether the introduction of the Sheraton will result in harm to the market ADR [average daily rate] in the competitive set?

A. It’s my opinion, there will be no prolonged effect. There may be initial impact on ADR for the first year or two, but no prolonged effect on market ADR’s.

Q. Do you have an opinion on whether what we’ve described as the competitive set, whether it’s ADR will increase through the year of stabilization for the Convention Center project, 2011?

A. Yes, I do have it increasing.

Q. Let me go back and ask you the same question about the occupancy rates. Do you have an opinion as to whether the introduction of the Sheraton Hotel will result in harm to the occupancy rates of the competitive set within the Erie market?

A. I believe there will be an initial impact on occupancy, and within a couple years will stabilize back out, and there will be no impact. So no long term impact.

Q. Do you have an opinion as to whether the introduction of the Sheraton would result in more room nights sold at the period of stabilization, than would occur in the year prior to the introduction of the Convention Center and the Sheraton?

A. Yes, I believe there will be more room nights sold.

N.T. February 3, 2006, at 116-17, R.R. 879a-880a. This testimony negates the hoteliers’ theory of undue economic burden based on unfair market competition from the host hotel.

Common pleas appropriately rejected the plaintiffs’ argument that the public funding and ownership of the host hotel must yield a different result than in Bold Corp., which upheld a room tax for the development of the Lancaster Convention Center and its adjoining privately funded host hotel. In Bold Corp., the Court, in explaining that common pleas had properly considered the impact of the entire convention center project, convention facility and host hotel in determining whether the benefits and burdens were disproportionate, quoted from common pleas’ opinion:

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.... 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 funding of competition in that a benefit would be created for one, through a tax on all. To the extent that there are room nights put back into the market above and beyond this absorption of the convention center business, 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. at 118, 801 A.2d at 475 (quoting common pleas op. at 11). That the plaintiff hoteliers in Bold Corp. were not funding the host hotel was not the determinative factor in upholding the tax. Rather, the determinative factor, in Bold Corp. and in the present case, is whether the plaintiffs established that they will not derive a sufficient business benefit from enjoying a share of the demand for hotel rooms induced by the new convention center. In Bold Corp., the benefit/burden inquiry focused on whether the private host hotel would absorb all of the additional room nights generated by the convention center meeting facilities leaving no benefit to be had by the taxed hoteliers, and the court found that it would not. In the present case, the court’s inquiry appropriately looked not only to whether the host hotel will absorb all of the new demand generated by the convention meeting facilities, and found that it would not, but also looked to whether the convention center, as that term is now statutorily defined as including both the meeting facilities and host hotel, will induce sufficient new demand to confer a benefit on the hoteliers, and found that it will. The testimony supports the finding that the host hotel alone will induce additional demand beyond that induced by only a convention meeting facility-

There is no authority for the proposition that tax subsidized competition from a public entity that intrudes on the profits of private enterprise is per se improper. To the contrary, in Pittsburgh v. AlCo Parking Corp., 417 U.S. 369, 94 S.Ct. 2291, 41 L.Ed.2d 132 (1974), the United States Supreme Court rejected such a contention. In Aleo Parking, operators of off-street parking lots sought to invalidate a tax on parking fees collected only by the private lot owners and not on parking spaces owned by the public parking authority. Pennsylvania’s Supreme Court invalidated the tax deeming it unreasonably high and concluding that, inasmuch as the private operators faced price competition from the publicly subsidized parking authority lots, “where such an unfair competitive advantage accrues, generated by the use of public funds, to a local government at the expense of private property owners, without just compensation, a clear constitutional violation has occurred.” Alco Parking Corp. v. City of Pittsburgh, 453 Pa. 245, 267, 307 A.2d 851, 863 (1973), rev’d, 417 U.S. 369, 94 S.Ct. 2291, 41 L.Ed.2d 132 (1974). The United States Supreme Court soundly rejected this conclusion, stating:

We cannot agree that these two' considerations, either alone or together, are sufficient to invalidate the parking tax ordinance. The claim that a particular tax is so unreasonably high and unduly burdensome as to deny due process is both familiar and recurring, but the Court has consistently refused either to undertake the task of passing on the reasonableness of a tax that otherwise is within the power of Congress or of state legislative authorities, or to hold that a tax is unconstitutional because it renders a business unprofitable.

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[W]e [are not] convinced that the ordinance loses its character as a tax and may be stricken down as too burdensome under the Due Process Clause if the taxing authority, directly or through an instrumentality enjoying various forms of tax exemption, competes with the taxpayer in a manner thought to be unfair by the judiciary. This approach would demand not only that the judiciary undertake to separate those taxes that are too burdensome from those that are not, but also would require judicial oversight of the terms and circumstances under which the government or its tax-exempt instrumentalities may undertake to compete with the private sector. The clear teaching of prior cases is that this is not a task that the Due Process Clause demands of or permits to the judiciary.

417 U.S. at 373, 376, 94 S.Ct. 2291. In a concurring opinion, Justice Powell pointed out that constitutional problems could arise at the extreme scenario where “punitive taxation of a private industry and direct economic competition through a governmental entity enjoying special competitive advantages would effectively expropriate a private business for public profit. Such a combination ... would be the functional equivalent of a governmental taking of private property for a public use.... ” Id. at 379, 94 S.Ct. 2291. The present plaintiffs have not demonstrated anything approaching the extreme scenario contemplated by Justice Powell and, under the principles set forth by the majority, the plaintiffs’ general objection to a publicly funded competitor does not justify the relief they seek.

Accordingly, we affirm.

ORDER

AND NOW, this 22nd day of August, 2007, the order of the Court of Common Pleas of Erie County in the above captioned matter is hereby AFFIRMED.

Footnotes

1

. This case was reassigned to the present author on May 29, 2007.

2

. As an historical note, the General Assembly sought to promote the development of convention centers and, thereby, stimulate business, industry, commerce and tourism by the enactment of the Act of December 27, 1994, P.L. 1375, formerly 16 P.S. §§ 13101-13124. Subsequently, by the Act of November 3, 1999, P.L. 461, as amended, 16 P.S. §§ 2399.1-2399.23, the General Assembly repealed and replaced the 1994 Act. The 1999 Act remains in effect. In October of 2000, the legislature enacted the "Alternative Provision,” cited above, specifying therein that it applies only to third class counties where a convention center authority had not been established prior to January 1, 2000.

3

. The Act authorizes that 80% of the room tax revenue be turned over to a municipal authority created for the purpose of developing and operating a convention center and that 20% be turned over to a local agency for the promotion of tourism. The hoteliers focus their challenge on the 80% of revenues devoted to the convention center.

4

. The written stipulation, in pertinent part, provides: "Plaintiffs shall not present any evidence or argument at trial that the collection of the [hotel room tax] by county hotels or the payment of the [tax] by hotel patrons in and of itself constitutes a burden for purposes of establishing or proving any claim (including, but not limited to, any federal or state constitutional claim) and/or any benefit-burden analysis which may be pertinent to any such claim.”