Is the County’s Hotel Development Incentive Program legal? Letter to AG Brian Frosh

Brian E Frosh
Attorney General
State of Maryland

Sir, We are seriously concerned whether a Hotel Development Incentive Program (HDIP) proposed by Frederick County complies with state law, and respectfully request an opinion from you. This incentive program (HDIP) is one little-publicized or discussed part of the proposal to raise the County Hotel Rental Tax (HRT) from 3 percent to 5 percent. County Executive Jan Gardner entered into a First Amendment to Memorandum of Understanding (MOU Amendment #1) with the president of the Tourism Council of Frederick County on June 27, 2016. The hotel development incentive program is Item 8 of 14 items dealt with in this agreement. It is also referred to in the staff report via Executive Jan Gardner to Frederick County Council about the tax rate increase and a new disposition of funds. We ask here about the lawfulness of the HDIP.

We quote from documents bundled in one 20-page pdf at this link to the County website:

https://frederickcountymd.gov/DocumentCenter/View/291110

Question 1. Up to 85% rebate of hotel taxes on approved hotel projects, funds going to service private debt rather than to Tourism Council? Is that lawful?

A rebate, or set-aside of hotel tax for debt service on select hotel projects appears on its face to contravene state law on both the collection and distribution of Hotel Rental Tax revenue.

at§ 20-406. Duty to collect tax

hotels must collect all the tax due at the prescribed rate, and there is no exception allowed for any rebated tax.

at § 20-410. Payment of tax collected
A hotel shall pay to the county the hotel rental tax collected for a calendar month with the return that covers that month.

This does not appear to provide for any rebate of tax either.

at § 20-419. “Revenue distribution–Frederick County
In general
(a) Frederick County shall distribute the hotel rental tax revenue as follows:
(1) a reasonable sum for hotel rental tax administrative costs to the general fund of the county; and
(2) the remaining balance to the Tourism Council of Frederick County, Inc., with a portion of the balance designated by the governing body of Frederick County to be used for a visitor center.

That is the full statement of how hotel tax may be paid, collected and distributed under the law. It appears to make no provision for the Tourism Council to select hotel projects on which it will rebate or set aside for private benefit any, let alone up to 85% of the prescribed tax. And it gives no hint that the Tourism Council might enter into commitments to rebate hotel tax for 25 years, or dedicate tax money to private debt service.

According to the Frederick County staff report the Tourism Council would not be accepting the tax money on hotel projects it wants to favor with HDIP incentives and then dispensing those monies:

” ‘Rebate’ is proposed to be 70% to 85% of hotel rental tax collected from a hotel and conference center accepted in to this (hotel development incentive)”

and

“No infrastructure development fund to be provided from countywide collections. Instead, a Hotel Development Incentive rebate/dedication model is proposed, where up to 85% of the Hotel Rental Tax generated by a hotel that meets the (hotel development incentive) program’s criteria can be dedicated to the project’s debt service for a period of up to 25 years.”

In this version of the program the hotel tax beyond 15% of normally due would simply not be collected. That seems to be in violation of § 20–406. Duty to Collect Tax

MOU Amendment #1 between the County Executive and Tourism Council in Item 8 presents the program differently “…Tourism Council will establish a Frederick County hotel and conference facility development incentive program through which up to 85% of the HRT (Hotel Rental Tax) collected from a facility accepted into the (incentive) program may be dedicated to servicing the debt on capital expenditures related to constructing the improvements required for a full service hotel and conference center designed to meet criteria of the (AAA) Four Diamond rating… for a period of up to 25 years, which amounts of HRT shall be set aside before Tourism Council makes the HRT revenue allocations established (earlier in the MOU amendment.)”

This suggests Tourism Council will collect 100% of the tax on all hotels as provided by state law, but for hotels favored by the incentive program it will “set aside” up to 85% for debt service for up to 25 years. It does not mention how the set aside funds will be handled, whether they will be dispensed to the favored hotelier, or whether its debt service will be conducted by Tourism Council.

This proposed ‘set-aside’ seems to be in violation of § 20-419. Revenue distribution–Frederick County which states exhaustively how the revenue is to be distributed but has no provision for any ‘set aide.’

Either way nothing in state law, we can see, authorizes any rebate or set aside or management of debt, or return of up to 85% of tax to a select hotel developer.

We request an opinion from you as to the lawfulness of this hotel development incentive program program as variously described by the County.

Question 2. Is it lawful for Frederick County to delegate to Tourism Council the administration of a hotel tax rebate scheme of this kind?

Tourism Council is a 501(c)(6) trade association working for the benefit of the tourism industry. Its membership comprises businesses and services with a financial interest in visitors coming to the County and they elect 17 members of a board. The Mayor of Frederick City, the County Executive and a non-Frederick City municipality make the board up to 20. The three local government members of the board are heavily outnumbered so despite their presence Tourism Council is a private trade association answerable not to citizens, or to local government but to its 300 trade members.

We accept that the law permits Tourism Council’s present small grant programs as well as direct tourism marketing. But the proposed Hotel Development Incentive Program seems to be a radical departure from Tourism Council’s accepted proposal-by-proposal, year-by-year grants for tourism-promoting events and activity. In effect Tourism Council is being asked to administer a two-tiered hotel rental tax — one at the 5 percent rate, another at 0.75 percent (5×0.15) for projects which it approves as eligible. By the MOU account it will do set-asides of hotel tax monies, by the county staff account it will rebate up to 85%. Regardless of method these are huge financial privileges for projects accepted into the HDIP incentive program.

Nothing we read in state law appears to contemplate the County’s proposal to delegate to Tourism Council the exercise of discretionary power to select capital projects for tax rebates or tax set-asides to service longterm debt.

We thank you in anticipation.

Jane Weir, Middletown MD

Peter Samuel, Frederick MD

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