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Municipalities seek hotel taxes as debate over spoils brews

Katie Tabeling
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In the last four years, hotels have faced a local lodging tax. The state may charge 8$ tax, but counties and towns are allowed to impose a 3% on top of it | DBT PHOTO BY JACOB OWENS

The Smyrna town council is moving to establish a 3% lodging tax, becoming the latest municipality to levy one on top of the state’s 8% accommodations tax.

Smyrna’s lodging tax, which would collect at least $50,000 in its first year, will help pay for town police operations. After watching 10 other counties and cities levy a similar tax in the last four years, Smyrna Town Manager Andrew Haines said it was time to follow suit. The town council passed the ordinance on Nov. 1. The lodging tax will go into effect in July 2022.

“Smyrna is a growing community and the demands for public safety continue year over year,” Haines told the Delaware Business Times. “[There is a need for] a mix of diversification of revenue for general governmental services with the potential of future growth in town.”

Since 2017, counties and towns have imposed their own lodging tax on the hotels within their jurisdictions to pass off the expenses of maintaining some public services that visitors use during their stay. Delaware has collected an accommodation tax from guests who stay at the estimated 150 hotels and short-term rentals for four decades, and the millions it brings in is split among tourism and marketing expenses (beach replenishment and the Delaware Tourism Office each receives an eighth of the revenue, while the three county visitors bureau split another eighth) and the general fund.

New Castle County and the cities of Newark, Middletown and Dover successfully lobbied the Delaware legislature to empower them to levy such a tax as a way to collect revenue for public infrastructure without passing the burden on to taxpayers. Before 2017, Wilmington and Fenwick Island were the only two municipalities able to impose their own hotel taxes.

“There’s a number of municipalities that felt like they were left out of the taxation, and Smyrna, Clayton and the Middletown regions are seeing a lot of growth in the last couple years. Especially with hotels,” said State Sen. Bruce Ennis (D-Middletown/Smyrna), who sponsored the bill that empowered Smyrna to levy a lodging tax in the last session. “Smyrna didn’t join in the effort a few years back, but seeing the direction things are headed, they decided it was time. I do predict growth there, and it’s already happening on the Route 13 corridor.”

 

In the past four years, New Castle and Sussex County have successfully imposed lodging taxes at 3% for all hotels in unincorporated areas of the county, which is the maximum under state law. However, Sussex County suspended collection for 14 months during the COVID-19 state of emergency.

In addition, Milford, Georgetown, Seaford and Rehoboth Beach have also joined northern and central municipalities in imposing their own lodging tax. Dover is the only city that opted to levy a tax under 3%. Instead, the city’s tax starts at 0.5%, and escalates each year. By July 2022, Dover’s roughly 25 hotel rooms will be taxed 1.5%. Wilmington’s lodging tax, which has been in place for at least a decade, remains at 2%.

“What concerns hoteliers is that this is directly impacting tourism, and you’re seeing more of these cities start to do it,” said Bill Sullivan, manager of the Courtyard by Marriott Newark who sits on the board of the Delaware Hotel & Lodging Association. “Is it the ultimate decision when it comes to a guest booking a room? Maybe, maybe not. But the meeting planners do when they need to find a place to host an event.”

For Delaware’s cities and towns, the lodging tax has been bringing in six-digit revenue figures since many started in Fiscal Year 2018. The largest beneficiaries include New Castle County at $6.2 million from its 46 hotels, Rehoboth Beach with $1.8 million from 23 hotels, and Newark with $1.45 million from nine hotels. Wilmington’s hotel tax has been in place for decades, but since FY 2018 it has brought in $2.6 million.

But for those who promote tourism in the First State, that revenue is bypassing them entirely in a system that has long since funded their marketing efforts. The law passed in 2017 has no language about splitting the revenue with their local tourism entity, despite years of protests from Sullivan and others.

“It was the whole basis to how the state pushed the lodging tax all those years ago: the tax is added onto the hotel room and it’s helping us market Delaware. This new local tax is frustrating and on top of the pandemic, it’s been challenging,” he said.

Last year, the Greater Wilmington Convention and Visitors Bureau lobbied Newark officials to cut them some of the revenue the city’s tax generates. A year later, Executive Director Jennifer Boes said it was “unfortunate” the municipalities in New Castle County did not see the same way.

“If we were able to receive a portion of this additional tax income, we could expand our marketing efforts to attract more leisure travelers and conventions to our region. That would be a win-win for all as it would equate to more revenue for these municipalities, their hotels, and our tourism industry overall,” Boes said.

For Southern Delaware Tourism Executive Director Scott Thomas, all boats will still rise with the tide.

“The way I see it, the General Fund trickles down to help support the visitors as well as the residents, in terms of infrastructure and other needs. Even if it is not directly spent on marketing, it helps serve needs that give visitors. Growing the economy is the most important thing,” Thomas said. “But I do think the consumer will not care as much as long as it’s competitive and on equal footing with short-term rentals.”

At this time, Kent County officials have not considered revisiting a lodging tax. In 2019, the General Assembly passed a bill that granted a lodging tax to fund the DE Turf Field near Frederica. After much controversy, county officials declined to move forward on adopting it on a local level and the Delaware legislature passed a bill that undid the measure in 2020.

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