Short-term-rental fee illegal, lawsuit says

Class-action challenge claims city’s levy is actually a tax

http://www.signonsandiego.com/news/2010/mar/19/short-term-rental-fee-illegal-lawsuit-says/

ENCINITAS — A landlord has filed a class-action lawsuit against Encinitas seeking to overturn the city’s annual fee on short-term rentals, calling it an illegal tax.

The effort is led by Edward Teyssier, a local libertarian leader and attorney who helped landlords in San Diego overturn a fee charged to businesses for processing taxes. Encinitas, a popular vacation spot, has many short-term-rental properties, defined as private homes rented for 30 days or less, usually to out-of-towners wanting to enjoy the coast.

The owners of short-term-rental properties already pay a 10 percent hotel tax. The permit fee for each unit is $150 per year, and is in addition to the tax.

Teyssier said the fee is actually another tax. Therefore, it should have been approved by a publ ic vote, he contends.

“It’s the same thing as in the city of San Diego in some ways,” Teyssier said. “The city is trying to impose a tax and avoid the vote requirement by calling it a fee.”

Teyssier filed the lawsuit last week in Superior Court on behalf of property manager Chris Carrico and other landlords who could eventually be added to the suit. The lawsuit seeks a court order declaring that the city’s fee ordinance regulating short-term rentals is unconstitutional. It also seeks refunds and attorney fees.

Tax increases require a vote under the state constitution, but cities have more flexibility with fees. Many lawsuits have focused on the difference in terms.

Encinitas Mayor Dan Dalager said he’s confident that the city’s fee will be upheld. “When we passed those rules, we spent a lot of time checking precedent and court cases, what happened in other places,” he said.

City Attorney Glenn Sabine declined to comment on the case.

Carrico is a property management firm owner who operates about 60 rental townhouses near La Costa Avenue and North Coast Highway 101 in Leucadia. She believes that Encinitas imposed the fee to raise revenue for its general fund, and said property owners don’t receive any benefit from paying the fee.

“We just feel at this time that the cities are overstepping their bounds regarding taxes and that everything they can think of, they’re taxing — and not calling it a tax,” Carrico said. “They’re calling it a fee or a permit.”

Carrico’s lawsuit also contends that the city’s fee is an illegal property tax, because any change of ownership requires the new owners to pay an additional fee for a new permit if they want to rent.

During the 2009 fiscal year, Encinitas collected about $17,470 from the short-term-rental fees, according to the city’s Finance Department, indicating that about 116 rental units are in the city.

Like most cities in the recession, Encinitas has faced declining revenue. It’s in a solid fiscal position, however, and hasn’t laid off permanent employees, officials say. The city manager trimmed the $50 million general-fund budget this fiscal year by restructuring departments, leaving some positions vacant, reducing contract services, and cutting travel and overtime budgets.

The council began debating short-term-rental regulations in 2005, because residents complained about renters crowding city beaches, hosting loud parties and hogging parking during the summer.

Defying strenuous opposition and threats of lawsuits from some homeowners, the council adopted a ban on future rentals. However, the move didn’t pass muster at the California Coastal Commission, which has the last say on regulations that affect coastal access.

In 2006, the city decided to regulate the short-term rentals and imposed the new permit and fee. In 2008, the city successfully sought voter approval to tax short-term rentals at the same rate as hotels.

 

Now, short-term rentals in Encinitas pay the permit fee and the 10 percent hotel tax.

Carrico contends that the city ordinance that created the permit fee is also intended to discourage people from renting out their property to outsiders. The ordinance states that landlords are liable for the conduct of their tenants. Among other measures, it requires landlords to post a telephone number outside their properties so people can report problems.

The lawsuit states, “A gullible Encinitas City Council, listening to an outspoken minority of ‘locals,’ apparently believes, wrongly, that excessive noise, drunkenness, vandalism, trash accumulation and illegal parking is rampant in Encinitas and would not exist but for this specific type of vacationers.”

In Teyssier’s lawsuit against San Diego, he represented landlords who sued to overturn the fees that the city charged to businesses for processing taxes. In August 2009, a state appeals court ruled that the practice was unconstitutional. San Diego canceled the fee.

At the time of the ruling, observers predicted that the case could lead to cities elsewhere having to drop processing fees.

Tanya Mannes: (760) 476-8243; tanya.mannes@uniontrib.com

http://www.signonsandiego.com/news/2010/mar/19/short-term-rental-fee-illegal-lawsuit-says/