Highway One files class action against Dewey Beach

A Dewey Beach business owner says town officials use business-license fees to fund operations, calling the fees an illegal tax.

Stephen Spence – attorney for Highway One Partnership, which owns several businesses in Dewey Beach – filed a class action complaint, Feb. 26, in Delaware Chancery Court against the town of Dewey Beach, Mayor Diane Hanson and Commissioners Joy Howell, Courtney Riordan, Anna Legates and Gary Mauler.

All six businesses in the class, including Rusty Rudder, Bottle and Cork and Dewey Beach Liquors, are owned or managed by Highway One Partner Alex Pires.

Commenting on the suit, Town Manager Marc Appelbaum said the town received it Feb. 27. License fees charged by the town are fair and reasonable, he said.

Since 2007, Dewey Beach has charged business license fees as high as $10,780 per year, exceeding the cost to administer and enforce the licenses, Spence wrote.  “By way of comparison, during the same period, the business license fees assessed in the adjoining towns of Bethany Beach and Rehoboth Beach average approximately $360 per year,” he said.

Spence said the town treats business license fees as revenue.  “Under well-established Delaware law, a fee that is used to generate revenue for general operations is deemed a tax,” he wrote.  “The town’s charter, as enacted by the General Assembly, does not authorize the imposition and collection of a tax on businesses.”

All taxes collected from each member of the class since 2007 should be refunded in full with interest, attorneys’ fees and the costs of the lawsuit, Spence wrote.

“In the alternative, plaintiffs and class are entitled to a full refund for the period 2007-2013 minus a reasonable license fee that does not exceed the average license fee assessed by Rehoboth Beach and Bethany Beach of $360 per year,” he wrote.

According to the lawsuit, the six businesses in the class have paid a total of $133,047 in business license fees since 2007; license fees for all businesses in town have totaled $1 million.

Spence said only the town knows the actual costs of administering and enforcing business license fees.

Pires said Spence repeatedly warned the town its license fee structure was illegal.  “They continue, for whatever reason, to deliberately break the law,” he said.

“We would prefer a property tax.  We think that’s the fair way,” Pires said.  “It’s expecting to run a town through all these gimmicks, and those gimmicks are illegal.”

Pires said the town should refund the license fees and avoid accruing more legal fees by defending the lawsuit.  “They lose every case.  They’re going to lose this case,” he said.  “They don’t follow the law.”

Town Attorney Fred Townsend said he expects to defend the town against the lawsuit, but would not comment on its contents.  “We’ll be investigating their claims,” he said.

Appelbaum said, "We are looking into it.  It is our position that what we've been charging is fair and just and reasonable."

Before 2012, restaurants with a liquor license were paying a base rate for licenses that was nearly four times more than the rate for restaurants without a liquor license.

Commissioners voted in February 2012 to standardize license fees for restaurants, without considering whether the establishment provides alcohol. According to Ordinance 690, all bars, restaurants and eateries pay a base fee of $273, plus $6 per person based on occupancy.

In November 2012, commissioners began discussing a possible increase in business license fees.  In response, Spence sent a letter to town council threatening legal action.

Dewey Beach Budget and Finance Committee held a meeting Feb. 16, proposing an additional gross receipts tax on businesses located in town.  Committee members said the tax would make up for a revenue shortfall.

At the meeting, Spence said Dewey Beach was putting itself in legal jeopardy by establishing a gross receipts tax.  “This is just a tax on the restaurants and bars,” he said.