Trade Association Argues USVI Timeshare Fees Violate Constitution

THE KIMBERLY STONECIPHER-FISHER REVOCABLE LIVING TRUST,
KIMBERLY STONECIPHER-FISHER, TRUSTEE and
AMERICAN RESORT DEVELOPMENT ASSOCIATION —
RESORT OWNERS' COALITION,
Plaintiffs,
v.
GOVERNMENT OF THE VIRGIN ISLANDS,
Defendant.

IN THE DISTRICT COURT OF THE VIRGIN ISLANDS
DIVISION OF ST. THOMAS AND ST. JOHN

PLAINTIFFS' MEMORANDUM IN SUPPORT OF
MOTION FOR SUMMARY JUDGMENT

Chad C. Messier
Dudley, Topper & Feuerzeig, LLP
1000 Frederiksberg Gade
P.O. Box 756
St. Thomas, Virgin Islands 00804
Telephone: (340) 774-4422
Email: cmessier@dtflaw.com

Kevin Johnson, Esq., pro hac vice
Baker Hostetler LLP
2929 Arch Street
Philadelphia, PA 19104
Telephone: (215) 564-2728
Email:kjohnson@bakerlaw.com

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TABLE OF CONTENTS

I. INTRODUCTION

II. FACTUAL BACKGROUND

III. THE SUMMARY JUDGMENT STANDARD

IV. ARGUMENT

V. CONCLUSION

TABLE OF AUTHORITIES

Cases

A.L. Blades & Sons, Inc., 121 F.3d at 874

A.L. Blades & Sons, Inc. v. Yerusalim, 121 F.3d 865 (3d Cir. 1997)

Allegheny Pittsburgh Coal Co. v. Cty. Comm'n of Webster Cty., W. Va., 488 U.S. 336 (1989)

Am. Trucking Ass'ns, Inc. v. Scheiner, 483 U.S. 266

Austin v. New Hampshire, 420 U.S. 656 (1975)

Bacchus Imports, Ltd. v. Dias, 468 U.S. 263 (1984)

Baldwin v. Fish and Game Comm'n of Montana, 436 U.S. 371 (1978)

Best & Co. v. Maxwell, 311 U.S. 454 (1940)

Boston Stock Exch. v. State Tax Comm'n, 429 U.S. 318 (1977)

Chalker v. Birmingham & Nw. Ry. Co., 249 U.S. 522 (1919)

City of Phila. v. New Jersey, 437 U.S. 617 (1978)

Clark v. Modern Grp. Ltd., 9 F.3d 321 (3d Cir. 1993)

Commonwealth Edison Co. v. Montana, 453 U.S. 609 (1981)

Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977)

Corfield v. Coryell,6 F. Cas. 546 (C.C.E.D. Pa. 1823)

Evansville-Vanderburgh Airport Auth. Dist. v. Delta Airlines, Inc., 405 U.S. 707 (1972)

Halliburton Oil Well Co. v. Reily, 373 U.S. 64 (1963)

Hegeman Farms Corp. v. Baldwin, 293 U.S. 163 (1934)

Hillside Dairy Inc. v. Lyons, 539 U.S. 59 (2003)

Hunt v. Washington State Apple Advert. Comm'n, 432 U.S. 333 (1977)

Interstate Transit, Inc. v. Lindsey, 283 U.S. 183 (1931)

Lunding v. New York Tax Appeals Tribunal, 522 U.S. 287 (1998)

Maryland v. Louisiana, 451 U.S. 755 (1981)

Maxwell v. Bugbee, 250 U.S. 525 (1919)

McBurney v. Young, 569 U.S. 221 (2013)

McCarroll v. Dixie Greyhound Lines, Inc., 309 U.S. 176 (1940)

Minn. v. Clover Leaf Creamery Co., 449 U.S. 456 (1981)

Mullaney v. Anderson, 342 U.S. 415 (1952)

Nippert v. Richmond, 327 U.S. 416 (1946)

Paul v. State of Virginia, 75 U.S. 168, 180 (1868)

Road Improvement Dist. No. 1 of Franklin Cty. Ark. v. Mo. Pac. R.R. Co.,274 U.S. 188 (1927)

Robbins v. Shelby, 120 U.S. 489 (1887)

Shaffer v. Carter, 252 U.S. 37 (1920)

Slaughter-House Cases, 83 U.S. 36, 79 (1872)

Sprout v. South Bend, 277 U.S. 163 (1928)

Supreme Court of N.H. v. Piper, 470 U.S. 274 (1985)

Toomer v. Witsell, 334 U.S. 385 (1948)

Travellers' Ins. Co. v. Connecticut, 185 U.S. 364 (1902)

Travis v. Yale & Towne Mfg. Co., 252 U.S. 60 (1920)

United States v. S.-E. Underwriters Ass'n, 322 U.S. 533 (1944)

W. Lynn Creamery v. Healy, 512 U.S.186 (1994)

Walling v. Michigan, 116 U.S. 446 (1886)

Ward v. Maryland, 79 U.S. 418 (1870)

Wheeling Steel Corp. v. Glander, 337 U.S. 562 (1949)

Williams v. Vermont, 472 U.S. 14 (1985)

Statutes

48 U.S.C. § 1542(a)

V.I. Code § 54(b)(2)

V.I. Code §§ 261, 262

2017 Act

Virgin Islands Revenue Enhancement and Economic Recovery Act of 2017

Rules

Fed. R. Civ. P. 56(a)

Other Authorities

Federal Constitution

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I. INTRODUCTION

This case challenges the Virgin Islands' discriminatory tax on non-residents. In late 2016, when faced with crafting a budget in light of continuing deficits and low economic growth, the legislature chose not to look to “the usual source — the business community or the backs of the working people and retirees of the Virgin Islands.” Instead, it targeted “external sources,” non-residents. Tailoring a tax to burden exclusively (or almost exclusively) non-residents turned out to be simple. Non-residents own nearly all (about 99% of) timeshares in the Virgin Islands. Residents, of course, have little use for timeshares, and most non-residents have little use for permanent homes or condos. Thus, at the urging of the Virgin Islands Governor (and with his signature), the legislature imposed a $25-per-day occupancy tax exclusively on timeshares — which timeshare owners now pay in addition to the generally applicable property taxes at the maximum mill rate.

However well intended, the tax is unconstitutional. The Constitution forbids states and territories from discriminating against non-residents and interstate commerce, and this prohibition forecloses the use of “proxies for differential treatment.” Hillside Dairy Inc. v. Lyons, 539 U.S. 59, 67 (2003). It is one thing to tax different property or commercial interests at different rates; it is another to gerrymander a tax by purposefully burdening interests correlated overwhelmingly or exclusively with non-residency. Because the Virgin Islands did the latter, its tax is unconstitutional. And, because none of the material facts is disputable, summary judgment is the proper stage for the Court to enjoin the tax.

II. FACTUAL BACKGROUND

A. The Timeshare Impact Fee

On March 22, 2017, the Virgin Islands legislature passed, and Virgin Islands Governor Kenneth Mapp signed, the Virgin Islands Revenue Enhancement and Economic Recovery Act of 2017 (the “2017 Act”). SOUF ¶ 1. This included an Environmental/Infrastructure Impact Fee for Timeshares (the “Timeshare Impact Fee”). SOUF ¶ 1; see also 33 V.I. Code § 54(b)(2). The Timeshare Impact Fee is imposed on the occupancy of a timeshare unit in the U.S. Virgin Islands at a rate of $25 per day of occupancy. SOUF ¶ 2. This includes occupancy by the timeshare owner or anyone else authorized to be present in a timeshare unit. SOUF ¶ 2.

The Timeshare Impact Fee is levied in addition to, not in place of, local property taxes. The property taxes paid by timeshare owners are taxed at the highest mill rate used for any classification of real property in the Virgin Islands. SOUF ¶ 6. The rate is nearly four times the rate applied to residential property and twice the rate applied to commercial property. SOUF ¶ 6. The Timeshare Impact Fee is also levied in addition to, not in place of, hotel room taxes, which apply by their plain language to timeshare units. SOUF ¶ 6. Neither the Timeshare Impact Fee nor any similar tax or fee is levied on other classes of property in the Virgin Islands. SOUF ¶ 7.

Revenue collected from the Timeshare Impact Fee is allocated by law as follows: (1) 15% goes to the Virgin Islands Tourism Advertising Revolving Fund; (2) for fiscal years 2017 through 2021, 85% goes to the General Fund; (3) for fiscal years 2018 and 2019 up to $4 million must be appropriated to and divided equally between two hospitals; (4) for fiscal years 2022 and 2023, 40% goes to the General Fund and 45% goes to the VIESA Contingency Reserve Account; and (5) for the fiscal year 2024 and thereafter, 85% goes to the General Fund. SOUF ¶ 8.

Under the 2017 Act, the Bureau of Economic Research and the Post Audit Division were required to conduct a study on the impact of timeshare activities and components in the Virgin Islands. SOUF ¶ 9. This was to be conducted within two years of passage of the 2017 Act. As of this date, the study has not been conducted. SOUF ¶ 9. No study on the impact of timeshare activities was conducted prior to passage of the 2017 Act. Consequently, no study of the impact of timeshare activities informed the Timeshare Impact Fee.

B. The Purpose of the Timeshare Impact Fee

Timeshares in the Virgin Islands are overwhelmingly, if not exclusively, owned by non-residents. SOUF ¶ 10. Governor Mapp and the Virgin Islands legislature knew this and used timeshare ownership as a proxy for non-residency to ensure that the Timeshare Impact Fee would obtain revenue from non-residents.

Governor Mapp first proposed the 2017 Act at a press conference held on December 12, 2016. SOUF ¶ 11. In introducing the legislation, Governor Mapp promised “[t]here will be no additional costs for food, clothing, mortgages or standard needs for living for locals. Our visitors that are utilizing our infrastructure and contributing waste and wear on the system will be asked to contribute their fair share.” Id. Four days letter, Governor Mapp formally proposed the 2017 Act to the legislature via letter. SOUF ¶ 13. In this letter, Governor Mapp stressed

It is important to emphasize that the new revenues we are seeking are not from the usual source — the business community or the backs of the working people and retirees of the Virgin Islands. Rather, we are seeking these new revenues from external sources who we are now asking to make a reasonable contribution to the upkeep of our infrastructure and the preservation of our pristine environment, which they enjoy. Simply put, this bill seeks a reasonable contribution from visitors to our shores and a slight burden on our business community to collect these revenues.

SOUF ¶ 13. Governor Mapp reiterated this intent in public statements issued regarding the 2017 Act. Id.; SOUF ¶¶ 15, 17.

The committee report recommending passage of the Timeshare Impact Fee tracked Governor Mapp's purpose in all respects, stating: “Under current law, there is no financial mechanism, save a real property assessment, for recouping the costs to the Territory of the infrastructure necessary to support the presence of so many welcomed visitors and timeshare owners.” SOUF ¶ 16. This language followed closely the language Governor Mapp used in advocating the Timeshare Impact Fee to the legislature. SOUF ¶ 16. No legislator objected to this characterization of the Timeshare Impact Fee's purpose or effect. SOUF ¶ 18.

C. This Litigation

The Plaintiff, the American Resort Development Association — Resort Owners' Coalition (“ARDA”), is a trade association that represents over a million timeshare owners. SOUF ¶ 5. Part of its mission is to protect and advocate for their rights to be free from laws that unduly burden them and the timeshare industry. SOUF ¶ 5. ARDA represents more than 1,000 owners of timeshare interests in the Virgin Islands, who would be affected by the Timeshare Impact Fee that is the subject of this litigation. SOUF ¶ 5.

ARDA filed this action on May 1, 2017, alleging causes of action under the “dormant” or “negative” Commerce Clause, the Privileges and Immunities Clause, and the Equal Protection Clause. Compl., ECF No. 1. On June 22, 2017, the Virgin Islands government moved to dismiss for lack of jurisdiction. Mot. to Dismiss, ECF No. 11. ARDA amended its complaint on July 12, 2017. 1st Amend. Compl., ECF No. 14. The Court granted the Virgin Islands government's motion to dismiss on December 19, 2017, with leave to amend. Order at 10, ECF No. 26. On January 5, 2018, ARDA filed its second amended complaint, 2d Amend. Compl., ECF No. 27, and the Virgin Islands government again moved to dismiss, Mot. to Dismiss, ECF No. 31. On September 30, 2018, this Court denied the motion, finding ARDA had alleged standing on behalf of its members and that it had stated causes of action under each of the three constitutional provisions. Order at 8-29, ECF No. 102.

The case entered discovery. As part of that process, ARDA sought to depose Governor Mapp. Magistrate Judge Ruth Miller denied that motion but held (on the Virgin Islands' government's concession) that ARDA may use Governor Mapp's public statements at trial. Order at 10-11, ECF No. 105. Although ARDA objected to the Magistrate's ruling, this Court has not acted on those objections. See Objections, ECF No. 109.

ARDA now moves for summary judgment.

III. THE SUMMARY JUDGMENT STANDARD

Summary judgment must be granted where “there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). Summary judgment is therefore appropriate to “resolve any legal issue that does not depend upon the resolution of disputed facts. . . .” Clark v. Modern Grp. Ltd., 9 F.3d 321, 335 (3d Cir. 1993).

IV. ARGUMENT

A. The Timeshare Impact Fee Violates the Commerce Clause

No state or territory, consistent with the Commerce Clause, may “impose a tax which discriminates against interstate commerce by providing a direct commercial advantage to local business.” Boston Stock Exch. v. State Tax Comm'n, 429 U.S. 318, 329 (1977) (cleaned up). But that is precisely what the Timeshare Impact Fee does. It is, by design, a protectionist measure crafted with the purpose and effect of raising money for the Virgin Islands government exclusively or almost exclusively from non-residents. As such, the tax violates the “dormant” or “negative” Commerce Clause.

A state-imposed tax satisfies the Commerce Clause only if each of the following four elements are satisfied: (1) it is applied to an activity with a substantial nexus with the taxing State, (2) it is fairly apportioned, (3) it does not discriminate against interstate commerce, and (4) it is fairly related to the services provided by the State. Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977). The Timeshare Impact Fee violates at least the third and fourth elements and therefore is unconstitutional.

B. The Timeshare Impact Fee Discriminates Against Non-Residents and Interstate Commerce

The Timeshare Impact Fee's discriminatory purpose is “sufficient” to condemn it under the Commerce Clause. Bacchus Imports, Ltd. v. Dias, 468 U.S. 263, 270 (1984) (emphasis added). “[W]here simple economic protectionism is effected by state legislation, a virtually per se rule of invalidity has been erected.” City of Phila. v. New Jersey, 437 U.S. 617, 624 (1978). If a tax “unquestionably discriminates against interstate commerce in favor of local interests[,]” “[n]o further hearings are necessary.” Maryland v. Louisiana, 451 U.S. 755, 756 (1981).

This case is unique in that the Court does not have to conduct an exhaustive search for discriminatory intent. Governor Mapp, and the Virgin Island legislature were quite explicit that they enacted the Timeshare Impact Fee to intentionally discriminate against non-residents and benefit residents.

The Court “need not guess at the legislature's motivation, for it is undisputed that the purpose of the” Timeshare Impact Fee “was to aid” local interests. Bacchus, 468 U.S. at 271. Governor Mapp wrote the Timeshare Impact Fee was crafted for the purpose of “targeting specific non-essential commodities and areas of the economy that can contribute more without increasing the cost of living to V.I. residents.” SOUF ¶ 13. He further stated that the goal was to obtain “new revenues from external sources.” Id. He advocated the tax before the legislature as imposing “no additional costs for food, clothing, mortgages or the standard needs for living for locals” and as burdening only “[o]ur visitors,” who “will be asked to contribute their fair share.” SOUF ¶ 11.

Following the Governor's lead, the legislative Committee on Finance recommended that the Timeshare Impact Fee be passed because it provided a “financial mechanism” for “recouping the costs to the costs to the Territory of the infrastructure necessary to support the presence of so many welcomed visitors and timeshare owners.” SOUF ¶ 16. Contemporaneous articles cited the purpose of the Timeshare Impact Fee as raising money from non-residents and avoiding any concomitant burden on residents. SOUF ¶¶ 11, 17. There is no evidence that any legislator disagreed with the Governor's or legislative history's characterization of its purpose. SOUF ¶ 18.

This is ample evidence of a protectionist purpose under governing law. For example, in Boston Stock Exch., 429 U.S. 318, the Supreme Court invalidated a transfer tax on sales of securities where the express purpose was to provide a commercial advantage to the New York Stock Exchange and other in-state exchanges. The legislature, the governor, and the New York Stock Exchange (the law's primary intended beneficiary) all acknowledged that the state's objective was to promote New York's exchanges at the expense of those in other states. Id. at 323–28 & nn.7, 10. The Court unanimously held that the statute violated the “fundamental principle” that no state may, through its tax scheme, favor local business over interstate commerce. Id. at 329; see also Hegeman Farms Corp. v. Baldwin, 293 U.S. 163, 171-72 (1934) (invalidating tax under the Commerce Clause because of “the official declaration of the purpose of its framers”); Hunt v. Washington State Apple Advert. Comm'n, 432 U.S. 333, 352 (1977) (finding statement of executive-branch official to be a “glaring” example of protectionist purpose).

This protectionist purpose is also manifest in the tax itself, which targets a property interest overwhelmingly, if not exclusively, owned by non-residents. Timeshare ownership was the chosen proxy precisely because it is an accurate and precise way to burden non-residents. The tax is therefore no different from the alcohol tax invalidated in Bacchus, which applied to all alcohol except fruit wine and a type of brandy produced from an indigenous shrub of Hawaii. 468 U.S. at 265–66. Although the statute did not state directly that Hawaii-produced alcohol was exempt, its precision in reaching the types of alcohol produced only in Hawaii rendered its purpose clear. Id. at 271 (“[T]he effect of the exemption is clearly discriminatory, in that it applies only to locally produced beverages. . . .”). The Supreme Court therefore treated the tax as no different from the tax invalidated in Walling v. Michigan, 116 U.S. 446, 455 (1886), which discriminated on its face between in-state and out-of-state alcohol. Bacchus, 468 U.S. at 271. The Timeshare Impact Fee is no different. It purposefully targets a type of property owned exclusively by non-residents precisely because it is owned by non-residents. That discrimination triggers a per se Commerce Clause violation. See id. at 270 (finding that “the State's purpose” was “sufficient to demonstrate the State's lack of entitlement to a more flexible approach permitting inquiry into the balance between local benefits and the burden on interstate commerce” (emphasis added)). “Other cases of this kind are legion.” W. Lynn Creamery v. Healy, 512 U.S.186, 195 (1994) (citing Bacchus and collecting other cases).

In this respect, the Timeshare Impact Fee differs from a legitimate state choice to tax different types of commerce or property at different rates. The discretion states have for such differentiation does not include the discretion to carve up taxation benefits and burdens to correlate perfectly with residency and non-residency. Here, again, the Timeshare Impact Fee has a direct analogue in taxation practices condemned in well-established and binding precedent. In Robbins v. Shelby, 120 U.S. 489 (1887), the Supreme Court invalidated a tax on “drummers,” or travelling salespersons, in the city of Memphis. Although no facial “discrimination [was] made between domestic and foreign drummers,” out-of-state manufacturers needed drummers to participate in the Memphis market (there being few other ways to advertise their products), and in-state manufacturers “have no occasion for such agents,” since they have “regular licensed houses of business there.” Id. at 497–98. By tailoring the tax to a service needed only by non-residents, not by residents, the facially neutral tax was as discriminatory as a facially discriminatory tax. See also Best & Co. v. Maxwell, 311 U.S. 454, 456–457 (1940) (striking down annual flat tax on those who were not regular retail merchants because its actual effect “is to discriminate in favor of intrastate businesses, whatever may be the ostensible reach of the language”); Nippert v. Richmond, 327 U.S. 416 (1946); Am. Trucking Ass'ns, Inc. v. Scheiner, 483 U.S. 266, 281 n.12, 284 n.16 (1987) (reaffirming this line of reasoning as good law).

The Timeshare Impact Fee is tailored in the same way. Although all timeshares are taxed at the same rate, Virgin Islands residents have little if any need for timeshares in the 250-square-mile territory where they permanently live, and timeshare owners have little if any need for permanent residency (such as a home or condo) in a location where they have no intention of permanently living. These market dynamics, of course, do not exempt timeshares from Virgin Islands taxation, but that is beside the point. In a taxing scheme not challenged here, the Virgin Islands already subjects timeshares to property taxes, and timeshares, in fact, are subject to the highest mill rate of any property interest in the Virgin Islands — nearly quadruple the residential-property rate and twice the commercial-property rate. Consequently, the Virgin Islands already exercised its discretion to tax timeshares at a different rate from other property interests, and it clearly exceeded its right to differentially tax different interests by using timeshare ownership as a. proxy for non-residency and adding — rather than substituting — the Timeshare Impact Fee to the tax already imposed.

The foreseeable, intended, and realized result is a competitive disadvantage between residents and non-residents. As Plaintiffs show in their unrebutted expert report, the Timeshare Impact Fee imposes costs on timeshares that translate into a direct competitive advantage in the real-estate market. The Timeshare Impact Fee is assessed against the timeshare resort, which, in turn, passes the cost to timeshare owners by raising the maintenance fee timeshare resorts charge. SOUF ¶ 20. This adds to the costs of the timeshare and detracts from its bottom-line value. Thus, a timeshare owner is at a competitive disadvantage in seeking to rent the accommodation as compared with, say, a home or condo owner who seeks to rent that property on Airbnb (or through any other means). Id. ¶ 33. The timeshare owner is also at a competitive disadvantage in seeking to sell the interest, which will result in lower property value. Id. ¶ 32. Further, the Timeshare Impact Fee places the timeshare developer at a competitive disadvantage by reducing the profitability of unsold interests, which developers routinely rent “to help defray their annual carrying costs associated with the operation of the resort.” Id. ¶ 33.

The Timeshare Impact Fee therefore achieves its discriminatory goal, and there was little to stop this in the political arena. The Timeshare Impact Fee burdens persons with little to no representation in the political process because non-residents may not vote in the Virgin Islands. 18 V.I. Code §§ 261, 262; 48 U.S.C. § 1542(a). Although “the existence of major in-state interests adversely affected . . . is a powerful safeguard against legislative abuse,” the interests in the Virgin Islands “which would otherwise lobby against the tax” are “mollified” because they do not have to pay it. W. Lynn, 512 U.S. at 200 (quoting in part Minn. v. Clover Leaf Creamery Co., 449 U.S. 456, 473, n.17 (1981)). They, in fact, benefit. Unsurprisingly, timeshare trade groups' efforts to lobby against the Timeshare Impact Fee gained little traction. That is precisely the context the Supreme Court has identified as meriting judicial intervention. Id. at 200 & n.17.

C. The Timeshare Impact Fee Is Not Fairly Related to Governmental Services

Although precisely tailored to target non-residents, the Timeshare Impact Fee is in no way tailored to compensate the Virgin Islands for timeshare owners' use of their infrastructure or burden on the environment. For that reason, it fails independently under the fourth prong of Complete Auto Transit, 430 U.S. at 279, which requires that a tax be “fairly related to the services provided by the State.”

The Timeshare Impact Fee's burden on non-residents is purportedly intended to support “the infrastructure necessary to support the presence of so many welcomed visitors and timeshare owners,” SOUF ¶ 16, but the Virgin Islands government appears to have done nothing to ensure that the tax had any relation to that purpose.

First, the Virgin Islands government has not studied the impact that timeshare owners have on infrastructure. For all it knows, they have either no impact or else that impact is entirely offset by timeshare owners' participation in the economy — including through property and sales taxes, products and services they consume, and the taxes local producers pay in servicing the enormous economic benefit the Virgin Islands obtains from this form of tourism. In fact, under the 2017 Act, the Bureau of Economic Research and the Post Audit Division were required to study the impact of timeshare owners on the Virgin Islands' infrastructure and environment within two years, but they have failed to do so. And, even if they had, it hardly makes sense to levy the tax and then only later find out whether the formula relates to the stated purpose. The fact that the study was not done before the Timeshare Impact Fee was crafted and passed is practically an admission that the $25 per-day figure was pulled from thin air.

Second, the revenue is not being spent even primarily to counteract any burden on infrastructure or the environment caused by timeshare owners. For most years, 85% of the revenue will go to the Virgin Islands general fund, and 15% will go to the Virgin Islands Tourism Advertising Revolving Fund — and at least that latter amount apparently will promote more tourism. (Encouraging more tourism is not a tailored means to mitigating the impact of tourism on the environment or infrastructure.) Indeed, for the years 2022 and 2023, 45% of the revenue will be allocated to the VIESA Contingency Reserve Account, which funds a negotiated litigation settlement between the Virgin Islands government and government employees. None of this has anything to do with infrastructure or the environment.

As a fee (1) imposed in addition to property taxes already levied and (2) advertised as being designed to apportion timeshare owners' fair share of infrastructure and environmental costs, the Timeshare Impact Fee must be evaluated as a “'user' fee[ ],” a tax “defended as a specific charge imposed by the State for the use of state-owned or state-provided transportation or other facilities and services” and held to a higher Commerce Clause standard than general taxes. Commonwealth Edison Co. v. Montana, 453 U.S. 609, 622 (1981). Thus, there must be “some fair approximation of use or privilege for use” that is “neither discriminatory against interstate commerce nor excessive in comparison with the governmental benefit conferred. . . .” Evansville-Vanderburgh Airport Auth. Dist. v. Delta Airlines, Inc., 405 U.S. 707, 716–17 (1972). The $25-dollar-per-day fee here is an excessive cost in addition to excessive property taxes, amounting up to a $9,125 per-annum fee regardless of the timeshare's value.

This rate has no relation to infrastructural or environmental harm. The number of days an owner occupies the timeshare has no bearing on how much of a burden the owner imposes on infrastructure. Some owners spend more time at their property; others spend more time touring the Virgin Islands. Although the Virgin Islands government may believe tying the tax to the number of days of occupancy somehow tailors it, the use the tax compensates is not the use of the property — for which no governmental service can be directly linked, at least that is not already compensated by ordinary taxes. The use it compensates is of infrastructure and the environment. In similar cases, the Supreme Court “has invalidated as wholly unrelated to road use a toll based on the carrier's seating capacity, Interstate Transit, Inc. v. Lindsey, 283 U.S. 183 (1931); Sprout v. South Bend, 277 U.S. 163 (1928), and the amount of gasoline over 20 gallons in the carrier's gas tank, McCarroll v. Dixie Greyhound Lines, Inc., 309 U.S. 176 (1940).” Evansville-Vanderburgh Airport Auth., 405 U.S. at 715. This case is no different.

Indeed, the tax is so far afield that it would fail even under the standard applicable to “a general revenue tax.” Commonwealth Edison, 453 U.S. at 621–22. Like a flat tax on a business that “bore no relation to the volume of business done or of returns from it,” Nippert, 327 U.S. at 427, or on truck axles that bore no relation to the miles traveled in the state, Am. Trucking Assn's, 483 U.S. at 280–87, a flat tax on occupancy bears no relations to the use of infrastructure or the environment. It is not tied to how much an owner drives, rides public transit, or traipses through nature, and it is not even tied to how many people are present at the timeshare property. Meanwhile, it is discriminatory as between residents and non-residents. A resident home owner may take a party of ten site-seeing and restaurant-hopping for a day, and a single timeshare owner may sit in the unit and read a book. But the non-resident timeshare owner is charged a $25 fee for supposed depletion of infrastructure and natural resources and the home owner is charged no corresponding fee.

To be sure, “the appropriate level or rate of taxation is essentially a matter for legislative, and not judicial, determination.” Commonwealth Edison, 453 U.S. at 627. But Plaintiffs here are not asking the Court to identify an appropriate taxation rate or level, nor is any factual inquiry needed on that point. What matters is that the Virgin Islands government did nothing to assess the purported costs of timeshare ownership. Instead, it employed the boogeyman approach, citing aged infrastructure and budget deficits and blaming the out-of-towners. And, because the out-of-towners cannot vote in Virgin Islands elections, there was no political brake on this tactic.

D. The Timeshare Impact Fee Violates the Privileges and Immunities Clause

The Timeshare Impact Fee violates the Privileges and Immunities Clause because it targets non-residents for a higher tax burden than residents. The Virgin Islands government can provide no substantial justification for this disparate treatment because it made no effort to assess whether the higher tax burden is justified by special costs attributable to timeshare ownership.

The Privileges and Immunities Clause “is designed to prevent the discriminatory treatment of citizens from other states.” A.L. Blades & Sons, Inc. v. Yerusalim, 121 F.3d 865, 869 (3d Cir. 1997); Baldwin v. Fish and Game Comm'n of Montana, 436 U.S. 371, 380 (1978) (“It was undoubtedly the object of the clause in question to place the citizens of each State upon the same footing with citizens of other States, so far as the advantages resulting from citizenship in those States are concerned.”). Among the “fundamental rights” protected by the Clause is the right to be free from “higher taxes or impositions than are paid by the other citizens of the state.” Id. at 395 (cleaned up); see also Corfield v. Coryell, 6 F. Cas. 546, 552 (C.C.E.D. Pa. 1823); Ward v. Maryland, 79 U.S. 418, 430 (1870); Supreme Court of N.H. v. Piper, 470 U.S. 274, 281 n.10 (1985) (confirming “those privileges on Justice Washington's list [in Corfield] would still be protected by the [Privileges and Immunities] Clause” (citing Baldwin, 436 U.S. at 387)); McBurney v. Young, 569 U.S. 221, 229 (2013).¹ The Privileges and Immunities Clause also “inhibits discriminating legislation against [non-residents] by other States . . . it insures to them in other States the same freedom possessed by the citizens of those States in the acquisition and enjoyment of property.” Paul v. State of Virginia, 75 U.S. 168, 180 (1868), overruled on other grounds by United States v. S.-E. Underwriters Ass'n, 322 U.S. 533 (1944) (emphasis added); McBurney, 569 U.S. at 229 (same citing Paul, 75 U.S. at 180).

The Timeshare Impact fee impinges these rights by subjecting timeshare property interests to a fee inapplicable to other interests and in addition to the property taxes levied under the Virgin Islands property-taxing scheme (which, as noted, applies the highest rate of any property to timeshares). As discussed above, the Timeshare Impact Fee's express purpose is to burden non-residents with taxes inapplicable to residents, and it is carefully tailored to reach only property interests for which residents have no use and for which non-residents have no substitute. As a result, the tax is in fact born almost exclusively by non-residents, which is how it was intended to work.

It is irrelevant that the distinction between residents and non-residents is not carved in the Timeshare Impact Fee's express language because, like the Commerce Clause, the Privileges and Immunities Clause forbids taxing legislation with a discriminatory purpose or effect. Hillside Dairy, 539 U.S. at 67. Thus, as under the Commerce Clause, the Supreme Court has invalidated state taxing regimes that carve up taxation burdens and benefits through “proxies for differential treatment.” Id. For example, in Chalker v. Birmingham & Nw. Ry. Co., 249 U.S. 522, 527 (1919), the Court invalidated a facially neutral statute because it imposed a higher tax rate based on the location of an individual's “chief office” — a characteristic that “commonly” distinguished residents from non-residents because residents would “ordinarily” maintain a local office in a state whereas non-residents would not. See also Hillside Dairy, 539 U.S. at 67 (reaffirming Chalker).

As in these cases, the practical operation and effect of the Timeshare Impact Fee is to burden non-residents in a discriminatory manner. See Lunding v. New York Tax Appeals Tribunal, 522 U.S. 287, 297 (1998) (“[W]here the question is whether a state taxing law contravenes rights secured by [the Federal Constitution], the decision must depend not upon any mere question of form, construction, or definition, but upon the practical operation and effect of the tax imposed.” (quoting citation omitted) (emphasis added)); Austin v. New Hampshire, 420 U.S. 656, 664 (1975) (discussing “practical effect” and “actual effect” of statutes); Travis v. Yale & Towne Mfg. Co., 252 U.S. 60, 82 (1920) (same); Shaffer v. Carter, 252 U.S. 37, 56 (1920) (finding reasoning errs when it “pay[s] too much regard to theoretical distinctions and too little to the practical effect and operation of the respective taxes as levied”). And, as in Hillside, this Court need not decide whether the Privileges and Immunities Clause “should be interpreted as merely applying the Clause to classifications that are but proxies for differential treatment against out-of-state residents, or as prohibiting any classification with the practical effect of discriminating against such resident,” 539 U.S. at 67, because the Timeshare Impact Fee uses timeshare ownership as a proxy for non-residency, as explained above.

Because the Timeshare Impact Fee substantially burdens non-residents' right to equality in taxation, the burden falls on the government to provide “a substantial reason for the difference in treatment,” Lunding, 522 U.S. at 298, identify “nonresidents are a 'peculiar source of the evil at which the statute is aimed[,]'” Blades, 121 F.3d at 871 (quoting Toomer v. Witsell, 334 U.S. 385, 399 (1948), and show “the discrimination practiced against nonresidents bears a substantial relationship to the State's objective,” Lunding, 522 U.S. at 298; Blades, 121 F.3d at 870. This standard is “substantially more rigorous” than rational basis, Austin, 420 U.S. at 663, and the Virgin Islands government cannot satisfy it.

First, it cannot provide a substantial reason for the difference in treatment because the Timeshare Impact Fee does not offset or compensate for other taxes solely applicable to residents. It is therefore unlike the tax in Travellers' Ins. Co. v. Connecticut, 185 U.S. 364 (1902), which was permissible even though it taxed non-residents' stock in local insurance corporations at a higher rate than residents' stock. The differential treatment was justified because the difference was tied to the difference in property taxes, which only residents paid, and it thus was tailored to ensure non-resident payment of a comparable fair share of taxes. Nor is the Timeshare Impact Fee like the tax upheld in Shaffer, 252 U.S. at 53, which levied a tax from nonresidents on their share of income derived from local property; this simply imposed the “ratable contribution in taxes for the support of the government” that residents also paid at comparable rates..

The Timeshare Impact Fee assess taxes in addition to the property taxes timeshare owners already pay; it has no analogue tax imposed on residents alone. “[I]nequalities that result not from hostile discrimination, but occasionally and incidentally in the application of a [tax] system that is not arbitrary in its classification, are not sufficient to defeat the law.” Maxwell v. Bugbee, 250 U.S. 525, 543, (1919). The Timeshare Impact Fee is, in fact, less justifiable than the commuter tax struck down in Austin, 420 U.S. at 665-68. In Austin, New Hampshire argued that credits commuters received in their home states counteracted the tax it imposed on commuters — which is not the case here — and even that was insufficient to save the discriminatory scheme, because “the only practical effect of the tax is to divert to New Hampshire tax revenues that would otherwise be paid to Maine. . . .” Id. at 666. That is discrimination against non-residents, not a valid justification. But, here, the only impact (and, indeed, purpose) is to raise money from non-residents to fill the Virgin Islands' coffers with money from other states. That condemns the law rather than justifies it.

Second, the Virgin Islands government cannot establish “nonresidents are a 'peculiar source of the evil at which the statute is aimed,'” Blades, 121 F.3d at 871. “'Peculiar' is defined as 'belonging exclusively or esp[ecially] to a person or group . . . tending to be characteristic of one only; Distinctive.'” Id. at 871 n.9 (quotation omitted). Although the government identified the supposed evil of infrastructure and environmental deterioration as justifications, it did not (as noted) make any effort to determine whether non-resident timeshare owners are the source of the perceived problem. Nor does it appear that it even defined the scope of that problem. The purpose, instead, simply appears to be that non-residents have money that the Virgin Islands government wants.

This justification is no better than the justification offered in Toomer, 334 U.S. at 398, where the Supreme Court invalidated a state's $2,500 license fee for non-resident shrimp boats when the fee for resident boats was only $25; the state provided no “elucidation” as to why non-resident fishing methods differed from the residents' methods or incurred any “greater cost of enforcing the laws against them.” So too here: the Virgin Islands government has not (because it cannot) explain why timeshare owners burden infrastructure or degrade the environment more than local residents do. Similarly, A.L. Blades & Sons, Inc., 121 F.3d at 874, invalidated a state statute requiring state officials to hire only resident laborers and mechanics on state-funded public works projects, and, although the state provided evidence that non-resident construction workers removed their income from the state, imposing an economic loss on its economy, that was not enough: “[w]hile . . . sufficient to demonstrate that nonresident workers [were] a source of the migration of economic benefits, it [did] not explain how they [were] a 'peculiar' or distinctive source of that problem.” The evidence here falls short even of that mark.

Third, the Virgin Islands government cannot prove a “a substantial relationship to the State's objective.” Lunding, 522 U.S. at 298; Blades, 121 F.3d at 870. It made no study of the impact timeshare owners have on the Virgin Islands infrastructure and environment before enacting the law, it still has not conducted the study the law requires it to conduct, and it uses the revenue for entirely unrelated purposes. “[S]omething more is required than bald assertion to establish a reasonable relation” between discriminatory taxes imposed and costs to a government. Mullaney v. Anderson, 342 U.S. 415, 418 (1952). But that is all the Virgin Islands government has to offer.

E. The Timeshare Impact Fee Violates the Equal Protection Clause

The Timeshare Impact Fee also violates the Equal Protection Clause. Even under rational-basis review, the Equal Protection Clause forbids “arbitrary” or “capricious” classifications — that is, classifications that do not rest upon “some reasonable consideration of difference or policy.” Allegheny Pittsburgh Coal Co. v. Cty. Comm'n of Webster Cty., W. Va., 488 U.S. 336, 344 (1989). Classification based on residency (or non-residency) is among the paradigmatic arbitrary and capricious classifications that fails even rational-basis review. See, e.g., Wheeling Steel Corp. v. Glander, 337 U.S. 562, 572 (1949); Williams v. Vermont, 472 U.S. 14, 27 (1985); Road Improvement Dist. No. 1 of Franklin Cty. Ark. v. Mo. Pac. R.R. Co., 274 U.S. 188 (1927). Accordingly, “equal treatment for in-state and out-of-state taxpayers similarly situated is the condition precedent” for a valid tax. Williams, 472 U.S. at 23 (quoting Halliburton Oil Well Co. v. Reily, 373 U.S. 64, 70 (1963)); see also id. at 23 n.7.

As shown above, residency is the operative classification of the Timeshare Impact Fee, and its facial neutrality is no more availing under the Equal Protection Clause than under the Commerce Clause or Privileges and Immunities Clause. A discriminatory purpose in crafting or enforcing a taxing law taints it with “discriminatory treatment.” See Allegheny Pittsburgh Coal, 488 U.S. at 345 (quotations omitted). Accordingly, the deference courts ordinarily pay to state taxing decisions does not apply. See Williams, 472 U.S. at 23–24. Nor can any rational basis for the distinction between timeshares and other forms of real property be identified. Timeshare owners already pay property taxes at a rate higher than what gas stations, shopping centers, and car dealerships pay (not to mention home owners). It is arbitrary to view timeshare owners as burdening the Virgin Islands economy, infrastructure, or economy more than these and other property owners, and there is no justification for the added burden of a $25-per-day occupancy tax. The purpose here is self-evidently to raise money from non-residents and exempt residents, and that is the Timeshare Impact Fee's sole purpose.

V. CONCLUSION

The Court should grant ARDA's motion for summary judgment and permanently enjoin collection of the Timeshare Impact Fee.

Dated: March 5, 2019

Respectfully submitted,

Kevin Johnson, Esq., pro hac vice
Baker Hostetler LLP
2929 Arch Street
Philadelphia, PA 19104
Telephone: (215) 564-2728
Email: kjohnson@bakerlaw.com

CHAD C. MESSIER
Dudley, Topper & Feuerzeig, LLP
1000 Frederiksberg Gade
P.O. Box 756
St. Thomas, Virgin Islands 00804
Telephone: (340) 774-4422
Email: cmessier@dtflaw.com