Colorado’s second-highest court rejected a plaintiff’s claim on Thursday that the tax revenue generated by an existing activity should prevent local governments from imposing new fees aimed at regulating the activity.

The question stemmed from Colorado’s unique constraints on taxation under the 1992 Taxpayer’s Bill of Rights. The constitutional amendment generally requires voter approval of new taxes and tax rate increases, while fees do not require a popular vote. Fees, as defined through court decisions, represent the costs of providing a service or regulating an activity, and do not raise money for the government more broadly.

After Breckenridge enacted an ordinance in 2021 that resulted in a fee of $756 per bedroom for licensed short-term rental units, Alexander Dorotik challenged its legality under TABOR. He argued the fee was actually a tax that required voter approval.

Dorotik also raised a novel argument for why the fee was problematic. Because short-term rental guests pay sales tax during their stay in Breckenridge and the town also imposes a lodging tax, short-term rentals are a revenue-generating activity for the town. Therefore, there is no need for a fee to cover the costs associated with that activity.

A three-judge Court of Appeals panel disagreed.

“We see nothing inherently unsound in Breckenridge regulating STRs — and providing additional fee-funded services in exchange for the charge — on activities that are also subject to the town’s general taxation scheme,” wrote Judge W. Eric Kuhn in the March 26 opinion.

Breckenridge commissioned a study that found that users of short-term rentals spend money locally, creating a need for local employees. However, those jobs do not pay enough for the workers to afford market-rate housing in the town.

The study recommended a fee on short-term rentals to help close the gap. Although the report calculated the maximum fee per bedroom could be $2,161, the town council set the ultimate amount at $756.

The ordinance indicated that the fee was “for the primary purpose of defraying the costs of housing policies and programs for the local workforce essential to the Tourism economy that benefits the short term rental licensees.” The town identified three uses for the revenue raised: Supporting Breckenridge’s housing policies and programs, addressing nuisance issues with short-term rentals, and funding short-term rental enforcement.

Dorotik, who owns a short-term rental in the town, alleged in his lawsuit that Breckenridge’s study neglected to factor in the existing sales and lodging tax revenue. All things considered, there is “no cost to Breckenridge” for short-term rentals.

In December 2024, District Court Judge Karen A. Romeo dismissed the case.

“Plaintiff cites no authority for its position that the government must include revenue generated from taxes into its cost analysis. Nor has the Court found any. To the contrary, the government may use its regulatory and tax powers in tandem,” she wrote. “And taxes and regulatory fees serve different purposes: taxes raise revenue for general government expenses whereas fees offset the cost of the benefit provided.”

Turning to the Court of Appeals, Dorotik argued his case was different from previous challenges to fees under TABOR.

“In every single cited TABOR fee case, there was no revenue generated by the activity that caused … the expense used to justify the fee. The cases all involve non-revenue generating activity that only exists as a burden on a municipality,” he wrote.

The parties primarily focused on a 2018 Colorado Supreme Court decision that upheld a 20-cent paper bag fee in Aspen as part of a “larger regulatory scheme.”

“Single-use bags do not make money for the city in and of itself,” Dorotik told the Court of Appeals panel during oral arguments. “If they were to just disappear, that would be great for the municipality. This activity (short-term rentals) disappears? The municipality loses money.”

In the Aspen case, “the underlying activity to that is indeed shopping, right? Shopping generates the bags,” responded Kuhn. “Single-use bags is what Aspen was trying to address. Both the use of them and the recycling of them. Aspen said, ‘We’re gonna set up a program and we’re gonna subsidize recycling to deal with this existing problem, which is bags associated with sales.'”

“How does this fee, in your view, not satisfy the direct and indirect costs of the service provided,” he continued, “or the regulatory program itself?”

In response to a question about Breckenridge collecting the fee while also benefiting from existing tax revenue, attorney Josh A. Marks said local governments are allowed to create fees to support programs previously funded by tax dollars.

Ultimately, the panel agreed the short-term rental fee did not require a vote under TABOR. As for the argument that the fee should not fund an activity that already generates money for the government, Kuhn wrote that the Aspen case demonstrated that it was permissible.

“Accordingly, for any shopping transaction in Aspen, consumers were paying both sales tax and the waste reduction fee,” he wrote. “Increased shopping leads to an increase in bag usage, but it also leads to an increase in sales tax. So contrary to Dorotik’s argument, we cannot say that this is the only TABOR fee case in which the underlying activity also generates tax revenue in another way.”

The case is Dorotik v. Town of Breckenridge.