The Meander Valley Council has closed the Westbury Recreation Ground to campers and Recreational Vehicles.
The crack down on overnight visitors on council land comes in the wake of complaints from locals about the legality of the practice.
The decision has caused an uproar from locals, with the council receiving nearly 100 negative comments on social media about the ban.
Andy’s Bakery has opened the back of its property for campers to stay for free, providing room for 30 people.
Westbury IGA owner Judy Fellows said businesses would suffer if RV owners didn’t have anywhere to stay.
“They go to all our businesses and we didn’t realise how much support we got from then until this happened,” she said.
Meander Valley mayor Craig Perkins said it was illegal to allow tourists to stay for free on council land.
“We’ve had somebody question [overnight stays] on planning grounds and the [Tasmanian Economic Regulator] has been advised,” he said.
“On that basis we’ve had to cancel overnight stays at the Westbury Recreation Ground.”
According to the National Competition Policy, any government-owned entity that is deemed as being involved in "significant business activities" must compete on the same terms as private businesses.
Free council-owned RV parks have a precedent of being labelled as “significant business activities”.
Councils must adhere to a “competitive neutrality agreement”, which dictates it must attempt to cover all its costs while providing camping services.
The state government and Tasmanian Economic Regulator enforce the National Competition Policy.
The Meander Valley Council first banned free camping last year, however the decision was overturned until after it received advice from the two bodies, before reinforcing the ban last week.
Cr Perkins noted that the law was not widely enforced, with many other councils operating free RV parks.
“It’s time we’re all given clear direction on what you can and can’t do,” he said.
The council was told by the Department of Treasury that guidance could not be given until a new government is formed after the election.