California Court Of Appeal Rejects Hotel Owners’ Constitutional Challenge To Transient Occupancy Tax And Upholds Validity Of City’s Subpoenas For Records Necessary To Audit Compliance

In City of Santa Cruz v. Patel, (— Cal.Rptr.3d —, 2007 WL 2702803, 07 Cal. Daily Op. Serv. 11,191, Cal.App. 6 Dist., Sept. 18, 2007), a California Court of Appeal again considered the issue of the constitutionality of a city ordinance imposing a “transient occupancy tax” and the enforceability of subpoenas issued by the city in conjunction with an audit of hotel owners to determine compliance with the tax. The court confirmed the constitutionality of the tax ordinance, and enforced the subpoenas.

Facts

The City of Santa Cruz (“City”) imposes a transient occupancy tax (“TOT”) of 10 percent upon stays of 30 days or less at hotels, motels, and like accommodations within City. By City ordinance, hotel operators are required to collect the tax from hotel guests and remit collected amounts to City, and City may conduct periodic audits to assure compliance.

The ordinance in question, the Uniform Transient Occupancy Tax Ordinance, defines a “hotel” subject to the TOT as a structure intended or designed “for occupancy by transients for dwelling, lodging or sleeping purposes . . . wherein overnight accommodations are offered for hire, or wherein living accommodations for periods of less than thirty days are customarily offered for hire.” (Santa Cruz Mun. Code §3.28.020(2)). “Transient” is defined as “any person who exercises occupancy or is entitled to occupancy . . . for a period of thirty consecutive calendar days or less.” (SCMC 3.28.020(4)). The definition of “transient” expressly excludes an occupant who has “paid [rent] in advance for a period of thirty days or more; and . . . [n]either the occupant nor the [hotel] operator may terminate the tenancy in less than thirty days.”

In February 2006, City notified nine local hotel owners (“Hotel Owners”) that it would conduct audits to determine TOT compliance. Hotel Owners refused to permit the audit and thereafter refused to comply with subpoenas, issued by City, directing Hotel Owners to produce documents pertaining to collection of the tax. City filed an application in superior court seeking an order enforcing the subpoenas, and Hotel Owners responded with constitutional challenges to both the tax and the subpoenas. The trial court rejected Hotel Owners’ arguments and directed them to comply with the subpoenas. Hotel Owners appealed.

Decision

After first determining that the trial court orders were appealable as “final judgments” because they determined all of the parties’ rights and liabilities at issue in the case, the Court of Appeal considered the merits of Hotel Owners’ case.

Hotel Owners’ basic arguments were that (1) the pertinent City ordinance violated both the due process and equal protection clauses of the United States Constitution; and (2) the subpoenas violated the Fourth Amendment because they were issued without probable cause.

Hotel Owners’ due process argument claimed the ordinance was “void for vagueness” because of its confusing language. For example, Hotel Owners argued that use of the term “dwelling” and “lodging” in the definition of “hotel” implied permanent residency and created an internal conflict as to how, and to whom, the TOT should be applied. The court disagreed. Language that is simply “confusing” or “ambiguous” does not equate to unconstitutional “vagueness,” the court said. City’s ordinance clearly applied only to temporary occupancy situations, and its language prescribed “a standard sufficiently definite to be understandable to the average person who desires to comply with it.” The court also noted that City’s ordinance is “very similar” to an ordinance considered and upheld in Patel v. City of Gilroy (2002) 97 Cal.App.4th 483; and that City’s ordinance was different from the language of ordinances considered and struck down for vagueness in City of San Bernardino Hotel/Motel Assn. v. City of San Bernardino (1997) 59 Cal.App.4th 237, and Britt v. City of Pomona (1990) 223 Cal.App.3d 265, cases which Hotel Owners had argued were controlling.

The court also rejected Hotel Owners’ challenge to the ordinance on equal protection grounds. Hotel Owners claimed the TOT unfairly classified for taxation “persons who cannot afford month-to-month housing and can afford residing at a motel only on a day-to-day basis.” Because City had demonstrated a rational basis for the tax, however – i.e., its “desire to tax persons for the privilege of enjoying short-term occupancy” within City’s jurisdiction – the equal protection argument failed, the court said. Although the court admitted that the ordinance might be unfair to some “long term” occupants who could not afford to qualify for the ordinance’s exclusion, such individuals would, at most, have to pay the tax only for the first 30 days of occupancy. The court held the ordinance did not infringe on fundamental rights, and thus was valid.

Finally, the court rejected Hotel Owners’ claim that the subpoenas violated the Fourth Amendment’s protections against illegal searches and seizures because they were issued without “probable cause” to believe that a compliance deficiency or irregularity exists. Formal compliance with “classic” Fourth Amendment requirements is not necessary for administrative or legislative subpoenas, the court said. Rather, City must show only that the subpoenas (i) are authorized by ordinance or similar enactment, (ii) serve a valid legislative purpose, and (iii) seek material that is pertinent to the subject matter of the investigation. City had shown its subpoenas were authorized by ordinance; were issued in furtherance of City’s lawful concern of determining compliance with the TOT by an uncooperative taxpayer; and sought material pertinent to the compliance audit. The subpoenas did not authorize actual entry or immediate inspection at Hotel Owners’ places of business, but offered them options as to how to comply; and Government Code § 37104 et seq. afforded a framework for judicial review of Hotel Owners’ challenge, the court said. As such, the subpoenas were lawfully issued, the court said, and affirmed, in all respects, the trial court’s order as to each Hotel Owner.