Court of Appeals Upholds City's Right to Audit Hotel Records

The First Appellate District of the Court of Appeals recently upheld the constitutionality of the City of Cloverdale's transient occupancy tax ("TOT") ordinance and its right to obtain business records to conduct an audit pursuant to the ordinance. The TOT ordinance requires hotel operators to collect an occupancy tax from all hotel guests who occupy a hotel room within the City for fewer than thirty days. The hotel owner in the case refused to comply with legislative subpoenas the City issued for the production of the business records, arguing that the TOT ordinance violated the due process and equal protection clauses of the United States Constitution. The City of Cloverdale was represented in this appeal by Joseph M. Quinn, Nancy Thorington, and Leah Castella, of Meyers, Nave.

In its due process challenge, the hotel owner argued that the definition of "hotel" in the ordinance was "hopelessly circular," and thus constitutionally vague, because it referenced the terms "dwelling" and "lodging."  These latter terms, according to the owner, imply permanent residency, making it unclear who owes the tax and potentially causing it to be due in some permanent residency situations. The court rejected the owner's arguments, noting that the ordinance clearly states that a "transient" includes only those hotel guests who occupy a hotel for less than thirty consecutive calendar days. Consequently, the ordinance language is not vague. And, because the ordinance "does not attempt to impose the TOT on the basis of either the type or location of the property," it could not be applied to permanent residency situations. The court further observed that other California appellate courts have rejected the very same vagueness challenge to TOT ordinances containing language substantially similar to the City's ordinance.

The court also rejected the equal protection argument in which the owner contended that the TOT ordinance improperly classifies "persons who cannot afford month-to-month housing and can only afford residing at a motel on a day-to-day basis."  First, the court stated that the owner misinterpreted the TOT ordinance because the ordinance does not impose the tax based on the type of property or the arrangement between the person who occupies the property and the hotel operator. Instead, the TOT applies equally to all those defined as "transients" under the ordinance. Second, the court observed that the classification of "transient" hotel occupants was a proper classification for taxing purposes, and this argument had been "laid to rest long ago" in another appellate court decision.

For more information about this case, please contact Joe Quinn at (510) 808-2000.