Tourism Marketing District navigates lawsuit maelstrom

Measures C and D won't necessarily settle hotel-tax issue

On November 8, residents will cast votes on Measures C and D. If passed, either one would alter the hotel-room tax as it currently stands. Measure C would raise the hotel taxes on guests to help pay for a new downtown Chargers stadium; Measure D, authored by San Diegans for Open Government attorney Cory Briggs, would raise the tax and redirect revenues from hoteliers into the city's general fund as well as preserve the current stadium site in Mission Valley for use as a park and higher education center.

Attorneys for the Tourism Marketing District and the City of San Diego are now contending with a lawsuit filed in August by Irvine attorney John McClendon on behalf of California Taxpayers Action Network. Much like a 2012 legal challenge, the new lawsuit questions the legality of the hotel tax as well as the changes that the Tourism Marketing District made in order to make the prior lawsuit disappear.

A Tourism Marketing District is Born

Established in 2008, the marketing district receives revenues from a 2 percent charge added to hotel-room fees. Revenues are then funneled to the district, run by San Diego's largest hoteliers, to finance promotions and marketing campaigns with the stated goal of boosting tourism in San Diego.

Opposition to the district surfaced shortly after the city approved its formation. Critics say the hotel tax violated state law in two ways. First, voters were never asked to approve the creation of a Tourism Marketing District; instead, only a small number of San Diego's largest hoteliers voted on the issue. Second, the money generated went back to hoteliers in the form of free marketing.

Opposition surfaces

While several advocacy groups opposed the district, San Diego's elected officials — including then-mayor Jerry Sanders — celebrated the marketing district as a job creator and a boost to the economy. When Bob Filner became mayor, the tune changed.

Filner wanted the city to see benefits from the hotel tax. In 2013, he refused to ratify a 39.5-year extension of the marketing district after hoteliers on the board ignored his wish to use some of the hotel-fee revenues to pay for the Balboa Park centennial celebration. Around that time is when the lawsuits surfaced.

In December 2012, San Diegans for Open Government sued the city and the district over what the group said was an illegal tax.

The lawsuit soon turned into a legal fight where outside counsel for the Tourism Marketing District labeled attorney Briggs as unethical, an attorney who made millions in taxpayer money in the name of taxpayer rights.

After four years of litigation, the case is coming to an end. The marketing district has agreed to amend the district so as not to include hotels with fewer than 70 rooms, rendering the lawsuit moot.

To date, the Tourism Marketing District has paid millions to its attorney Michael Colantuono and his Sacramento-based law firm; the district could potentially be on the hook to pay millions more to Briggs.

With the lawsuit from the California Taxpayers Action Network comes a new round of legal action.

More opposition

According to documents obtained by the Reader, despite the experience in defending the marketing district, the city and hoteliers are getting off to a shaky start.

In an October 26 court document filed in the San Diegans for Open Government case, attorneys for the district claim the possibility for lawsuits is increased by amending the marketing district to no longer require hotels with fewer than 70 rooms to pay the fee.

"[The marketing district's] position is not that the 2016 amendments to the [marketing district] assessment are immune from legal challenge, but instead that any challenges to the 2012 renewal of the TMD assessment — at issue in this case, and which the plaintiff is challenging in the case [San Diegans for Open Government] discusses — are now time-barred or barred by the validation statutes. The substance of the 2016 amendments to the [marketing district] assessment may be challenged by any party with standing."

Attorneys took a different tone in a letter sent one day prior to attorney McClendon and his client California Taxpayers Action Network.

"The August 2016 modification to the [marketing district] assessment did not 'establish' the district or 'levy' or 'authorize' the assessment; it merely changed the assessment so that only certain hotels are now assessed," reads the letter from Colantuono and San Diego deputy city attorney Carmen Brock.

"The city established the district and levied and authorized the assessment in November 2012 when it renewed the [marketing district]. [California Taxpayers Action Network's] complaint, filed in September 2016 and which challenges the validity of the [marketing district] assessment, comes more than three years too late. Moreover, your complaint intertwines allegations as to actions in 2016 with allegations as to actions in 2012 which are plainly outside the statute of limitations."

Continued the letter, "Your client is entitled to zealous advocacy and we expect no less of you. That advocacy should be confined to timely, non-frivolous challenges to city actions related to the [marketing district] assessment as to which your client has standing and which were not, and could not have been, decided in the [San Diegans for Open Government] litigation. Please notify us no later than Monday, October 31 that you will dismiss or amend [California Taxpayers Action Network's] complaint so we need not prepare a motion for sanctions. If you do not, we reserve the right to seek sanctions from [California Taxpayers Action Network], your law firm, and any other firm that has appeared for [California Taxpayers Action Network] in this matter on the grounds listed above and any other applicable theory. We hope that will be unnecessary."

City and District Okay with 50/50 Odds?

The contrasting letters show the legal obstacles that remain for city and marketing district attorneys to defend the hotel tax — the same obstacles that were present during the San Diegans for Open Government complaint.

That much is seen in an April 2015 email obtained by the Reader, in which Colantuono informed then–marketing district executive director Lorin Stewart that the district and city had a 50 percent chance of winning.

In his email, Colantuono celebrates what at the time appeared to be a win in a similar lawsuit over the Ontario and Rancho Cucamonga Tourism Marketing District — also filed by Briggs, but on behalf of Inland Oversight Committee, another client.

In that case, an appellate court appeared poised to strengthen the legality of assessment districts such as marketing districts. The appellate court later decided against such language.

"If [the appellate court ruling] becomes final," Colantuono wrote, "it will [sic] takes my estimate of a win on the merits [in the San Diego Tourism Marketing District case] from 50 percent to about 85 percent — as near a sure thing as litigation ever allows."

The attorney then added that the marketing district could abandon its preferred defense, to concentrate on whether San Diegans for Open Government's members had standing to sue and instead focus on the merits of the assessment.

In his April 2015 email, Colantuono showed optimism that the Ontario and Rancho Cucamonga ruling could allow them to ditch the defense.

"...[W]e may not longer have need of the standing defense give[n] that the law may soon be with us on the merits."

But the appellate court failed to address the merits of Ontario and Rancho Cucamonga case. Meanwhile in San Diego, judge Joel Wohlfeil ruled that in fact San Diegans for Open Government did have proper standing to sue.

That ruling eventually paved the way to talks of a settlement, which after being abandoned, resulted in the marketing district agreeing to amend the rules by leaving out hotels with fewer than 70 rooms, which in turn appears to have left the city and hoteliers in familiar setting: in a courtroom, hoping to keep the hotel tax intact.

A hearing in the California Taxpayers Action Network case is set for March 2017. As for San Diegans for Open Government's case, the two sides are set to fight over attorney fees for Briggs.

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It would be one thing if the hotels ownership paid their staff a living wage but they don't. They use the tax to attract tourist not for the greater good but their own enrichment.

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