A ruling handed down on Tuesday by the 3rd Circuit Court of Appeals cleared the way for the U.S. Virgin Islands to keep collecting a $25 per day occupancy fee on timeshare units, which has been challenged by timeshare groups in the territory since the fee was passed four years ago.
On appeal, the 3rd Circuit decision upheld a previous District Court ruling that rejected claims that the occupancy fee on timeshare units in the territory is unconstitutional. The legal battle has been ongoing since the passage of the Virgin Islands Revenue Enhancement and Recovery Act in 2017 and this week’s ruling appears the final step in the process.
In 2017, the American Resort Development Association’s Resort Owners’ Coalition, a nonprofit lobbying organization for the timeshare industry and 1.6 million timeshare owners, filed suit in federal court against a $25 per day occupancy fee on timeshare units in the territory.
In the complaint, the plaintiffs argued the fee is “targeted, discriminatory, revenue legislation that has the purposeful intent to impose fees almost exclusively on interstate commerce violates the Commerce Clause,” citing various times former Gov. Kenneth Mapp said the legislation aimed to seek funding from visitors to the territory.
Testifying before the Senate in February 2017, then Finance Commissioner Valdamier Collens told lawmakers the fee was projected to generate around $19 million per year. At the time, the government also increased tobacco, alcohol and soda taxes, which were projected to generate similar amounts of revenue. It also increased hotel occupancy taxes and gross receipts taxes in recent years, to try to staunch the territory’s deficits.
At the time, the timeshare group also argued the fee was unconstitutional and would hurt business, saying that timeshare owners in the USVI already paid the highest real estate property tax rate in the territory, making this particular fee “an exorbitant burden” on the ability of the territory to compete with similar markets.
While the V.I. rate for timeshares is higher than other V.I. property tax rates, V.I. property tax rates are actually lower than most states. According to the Tax Foundation, 49 of the 50 states have higher homeowner property tax rates than the USVI, with only Hawaii, at 0.28 percent, coming in lower. The V.I. rate for timeshare units is 1.407 percent, a bit lower than Hawaii, which charges 1.43 percent for timeshares.
Along with the $25 per day occupancy fee, the Virgin Islands Revenue Enhancement and Recovery Act also allocates the revenues from the timeshare tax to the Virgin Islands Tourism Advertising Revolving Fund, the General Fund and, for a period of time, to the VIESA Contingency Reserve Account.
On April 8, 2020, the District Court ruled in favor of the government and rejected the plaintiffs’ argument that the timeshare tax is unconstitutional. The decision was appealed to the 3rd Circuit, which on Tuesday affirmed the District Court’s decision and held that the territory “taxes resident and non-resident taxpayers at equal rates,” and “apportions its tax based on consumption.
“The Third Circuit explained that it is not ‘inherently discriminatory’ for the territory to shift its tax burden to non-resident consumers,” according to a statement on Tuesday from the V.I. Justice Department. “The Third Circuit further held that the timeshare tax was designed to capture consumption spending by non-residents. With the Third Circuit’s decision upholding the constitutionality of the timeshare tax, the government can continue to collect these revenues, which can be used to advertise and promote tourism in the Virgin Islands and meet some of the government’s financial obligations.”
To date, the government has collected approximately $14 million in timeshare taxes, the statement said.