A special sales tax to fund supplemental police patrols in the French Quarter will be reinstated starting in October after expiring at the end of 2020. The tax was approved by voters in an April ballot measure and was supposed to take effect last month, but it was delayed due to a legal dispute over whether hotel room sales could be exempt, as they had been previously.
But on Thursday, the New Orleans City Council, acting as the French Quarter Economic Development District, the state-created body responsible for levying the tax, voted to reinstate the tax with the hotel exemption intact.
It’s still not clear whether the legal issues surrounding the hotel room cut-out are resolved. The exemption, which was not included in the April ballot language that went before French Quarter voters, appears to fly in the face of a decision made by the State Bond Commission in consultation with the State Attorney General’s Office earlier this year, as well as a legal opinion sent to The Lens in July by Mayor LaToya Cantrell’s office.
The chair of the Economic Development District, Councilwoman Kristin Palmer, has yet to fully explain how Thursday’s resolution is consistent with the State Bond Commission guidance. On Thursday, she said she was unaware of the objections from the Cantrell administration.
Maintaining the hotel exemption was a major priority for the French Quarter Management District, a state-created board made up of representatives of the hospitality industry, French Quarter residents and city government. The FQMD has been extremely influential in the renewal process for the tax, and was given explicit administrative authority over the funds it will generate through the April ballot measure.
In July, as council members were preparing to reinstate the tax, the FQMD asked Palmer to delay the tax by three months due to uncertainty over the legality of the hotel exemption. The request to delay was criticized by one FQMD board member, who said that it was bad for public safety and called the FQMD a “business dominated board.”
The result of Thursday’s vote is that businesses will be required to collect the tax beginning in October. But before any of the money is actually spent, the city needs to finalize a cooperative endeavor agreement between Mayor Cantrell, the FQEDD and the FQMD.
The hotel exemption
Thursday’s meeting didn’t include any public discussion about why hotel room sales were being exempted from the tax. In an interview after the meeting, Palmer defended the exemption, saying that hotel room sales are already subject to a number of special taxes that don’t apply to other businesses.
“The hotel rooms pay additional taxes over and beyond what the regular sales tax is,” Palmer said. “So this would be considered like a triple tax.”
She also emphasized that the exemption was only for hotel room rentals, and that other sales at hotels, like at hotel bars or restaurants, would still be subject to the tax.
But Palmer didn’t have a complete rebuttal to the legal concerns raised by the city and State Bond Commission. Her only explanation was that the exemption was a matter of precedent.
“The precedent is established because it’s been that way for the past five years,” she said. “That was always the agreement and always the arrangement.”
The French Quarter public safety tax, sometimes referred to as the “quarter for the quarter,” was first approved by French Quarter residents in 2015 and went into effect in 2016. From 2016 until 2020, the funds were exclusively used to pay for additional patrols in the neighborhood by the Louisiana State Police.
Hotel room sales were exempt from that tax. The exemption wasn’t explicitly included in the 2015 ballot measure, but was later implemented through a FQEDD resolution at a 2016 meeting.
As The Lens previously reported, the legal justification for that decision wasn’t mentioned during that meeting, nor any other FQEDD meeting in 2015 or 2016. The only explanation The Lens was able to find was a footnote in a 2015 BGR report on the ballot initiative.
“In correspondence with BGR, the city pointed out that economic development districts, by statute, may levy ‘up to two percent of sales taxes, or up to two percent of hotel occupancy taxes.’ (La. R.S. 33:9038.39.) It indicated that, because the language implies a choice between two options, the sales tax should not apply to hotel occupancy.”
As the former tax was about to expire at the end of last year, the FQEDD and Cantrell unsuccessfully attempted to renew the tax through a December 2020 ballot measure.
Under a plan from the Cantrell administration, the money would have been split between paying for local police patrols and civilian “grounds patrol” units that could help with quality of life issues. The FQMD campaigned against it, and the ballot measure failed with 595 opposed to 297 in favor.
The FQMD wanted a larger oversight role and more money dedicated to police patrols through a program it has managed since 2016 — the French Quarter Task Force. After the December ballot measure was shot down, the FQMD began working directly with the FQEDD to introduce a new ballot measure that would give the FQMD explicit administrative powers over the funds.
The original April ballot language crafted by the FQMD and FQEDD also included an explicit exemption for hotel room sales. But before the language was finalized, it needed approval from the State Bond Commission. And in February, commission analyst James Pounders told the city the commission wouldn’t approve the ballot language unless the hotel rental exemption was removed based on legal advice from the Attorney General’s Office.
“It does not appear the proposition is able to move forward in its current state,” Pounders said. “Essentially, in order to be exempt from local sales taxes, it must either be (1) an item that is exempt from state sales taxes; or (2) a specific tax exemption granted by the legislature that is applicable to all political subdivisions/taxing authorities.”
He said that his office looked at state statute regarding local sales tax exemptions, and that it didn’t appear that hotel rooms had any statutory exemption from sales taxes.
“Regardless, we think the FQ EDD must provide the statute that they are relying on when granting the hotel tax exemption,” he said.
Lela Folse, director of the State Bond Commission, told The Lens on Thursday that the commission hadn’t revisited the issue since February, and therefore its stance hadn’t changed.
The FQEDD ultimately removed the exemption from the April ballot, but the FQMD was still determined to establish the exemption through other means.
Cantrell’s office, however, has taken the same position as the Bond Commission. City officials sent The Lens a July opinion from its legal counsel that also said hotel room rentals cannot be exempt from the tax.
“The tax cannot provide an exemption for hotels. That being said, if no one litigates the issue, it may go forward unnoticed. In this instance, the State Bond Commission brought the issue to light, and the FQEDD amended the voter proposition to take out the exemption for hotels. The public is on notice that the hotel exemption was an issue, and it would be highly risky for the FQEDD to attempt to exempt hotels.”
The opinion explicitly warned that the FQEDD could not pass a resolution to create the exemption, which is exactly what the FQEDD ended up doing on Thursday.
The Cantrell administration, meanwhile, is in the process of negotiating a cooperative endeavor agreement governing the administration of the tax proceeds, which must be signed by the mayor, the FQEDD and the FQMD before the proceeds of the tax can actually be spent.
Though the language in the ballot initiative called for giving control to the FQMD, the administration has consistently opposed handing over the funds to the unelected board.
“The core issue here is really around good governance,” Josh Cox, a senior adviser to Cantrell, said during a January FQEDD meeting. “And the principle is simple: When taxpayer money is collected, the people who are administering that money should be directly elected by taxpayers.” (There are several examples of existing property and sales taxes administered by unelected boards. In fact, the Cantrell administration, as part of its 2019 “fair share” infrastructure funding deal with the tourism industry and the state, helped negotiate a new short-term rental tax law that hands over a portion of collections to New Orleans & Company, the city’s tourism marketing agency, which is not only unelected but privately run.)
The most recent draft of the French Quarter sales tax CEA, provided by the city, effectively gives the mayor and City Council final authority over how the money is spent.
The city can’t spend the money on whatever it wants. It will still need to be primarily used for supplemental police patrols as set out in the ballot language approved by voters. But the city and City Council will have authority over the exact details of the annual budget.
The annual budget for the funds, according to the current CEA draft, will be written by the city’s chief administrative officer and approved by the City Council. The FQMD will have the opportunity to recommend changes to the budget before the FQEDD finalizes it, but it doesn’t appear they have any type of veto authority if the FQEDD chooses not to accept those recommendations.
The CEA hasn’t been signed yet. On Thursday, along with the vote to levy the tax, the FQEDD voted to give Palmer the authority to negotiate and sign the CEA on its behalf. And on Monday, the FQMD is holding a special meeting to consider approving the agreement.
The original agenda for the FQMD’s Monday meeting included a discussion about the issue of French Quarter businesses that have continued to collect the quarter-cent sales tax throughout 2021 even though it expired at the end of 2020. (That item was removed from the agenda on Thursday and will no longer be part of Monday’s meeting.)
French Quarter Business Association Executive Director Brittany Mulla McGovern told The Lens this week that the city failed to inform businesses to stop collecting the tax.
“To the best of our knowledge, the City of New Orleans never notified businesses within the FQEDD boundaries to cease collection,” McGovern said in an email. “We hope that the City will manage the sales tax more efficiently in the future.”
In response, Cantrell spokesman Beau Tidwell told The Lens that “we did in fact alert businesses that the tax expired, in a press release dated June 30th.” The tax had expired six months before that press release was issued.
Tidwell did not answer questions about whether there is a standard procedure for notifying businesses about expiring sales taxes and whether that procedure was followed in this case. He also didn’t respond to a question about how much money the city has collected from the expired tax so far this year.
This story has been updated to reflect that the French Quarter Management District has removed a discussion about erroneously collected taxes from its upcoming meeting agenda.