Originally published on Forbes.com.
In the seemingly endless dispute between municipalities and online travel companies, the online travel companies have scored another win. This time it was in the Supreme Court of California. Whatever you may think about the merits of this litigation, you have to admit that it has been good for the legal profession. I’m beginning to think that the various state legislatures might have left ambiguity in the various statutes in order to create a kind of white-collar jobs program. The issue is whether hotel occupancy taxes charged by San Diego should be computed by applying the tax rate to the amount that the online travel company charges the customer or the amount that the online travel company pays the operator.
Latest Outcome
The California Supreme Court mostly went with the on-line travel companies in this case, although giving just a bit of ground to the city.
San Diego contends the entire amount paid by the customer, presumably including any portion of the markup within the exclusive control of the OTC above that set by the hotel, is subject to the tax because that amount is charged “for the privilege of Occupancy” within the meaning of the ordinance, and no lesser amount will gain that privilege for the customer. This contention, however, fails to acknowledge that the relevant ordinance identifies the taxable amount as the rent “charged by the Operator” —and the only such amount involved in online room rental transactions is, as we have seen, the wholesale room rate plus any portion of the markup set by the hotel pursuant to the contractual rate parity provisions or otherwise. Thus, it is the wholesale room rate plus the hotel-determined markup, exclusive of any discretionary markup set by the OTC, that is “charged by the Operator” and subject to the tax.
To the extent that the hotel requires the OTC to maintain its markup, there can be additional tax charged over that based on the wholesale amount going to the operator. The partial win for the city seems to be vitiated a bit in the next sentence.
Because, however, the ordinance imposes on “the Operator” alone the duty to remit the tax and subjects the operator alone to the assessment process when taxes are determined to be unpaid and owing , it does not appear to contemplate that the city treasurer may assess an intermediary such as an OTC for unpaid transient occupancy tax.
It seems like the city might have to chase the individual hotels for the extra amount and there might not be time for that. Contractually, the extra might come out of the online travel companies, but the city cannot get it from them directly.
The likely bottom-line outcome here is that there will be more tax collected in the future but no great windfall from the past.
Keeping Score
The Tax Foundation toted up the score on these cases in a paper by Joseph Henchman early this year noting that over the past decade state and local governments in 34 states, the District of Colombia and Puerto Rico have filed lawsuits against the likes of Expedia, Hotels.com, Priceline and Travelocity. Overall the online companies have been winning prevailing in 39 cases in 23 states while losing in ten cases in six states and the District of Columbia. We should probably score this one as a win for the online companies.
The Tax Foundation seems to lean a bit to my theory that all this litigation is something of a white-collar jobs program.
In four out of five cases brought by cities against OTCs, the only people that win are the lawyers. Cities get no additional revenue and send a signal that they seek aggressive and unjustified taxation of one set of businesses that happens to be primarily non-resident. The costs imposed in filing and defending these lawsuits are also passed along to taxpayers and travelers. While it is important that state and local governments collect revenue to provide services for their constituents, that need cannot justify discriminatorily taxing non-residents, or taxing only services primarily used by nonresidents while everything else is exempt.
The Tax Foundation argues that national legislation might be in order.
When cities and states act in such a way, investment and economic growth can be chilled as other businesses take note. Such a burden in one municipality is at best a bother. But when multiplied across the country, it can quickly become death by a thousand cuts. One option for addressing this problem is a federal bill or amendment that is designed to narrowly bar discriminatory taxation of online travel company services.
Even the fondest fan of federalism might admit that interstate commerce is involved here.
Things Looking Up For The Online Companies
The online travel companies seem sanguine about their chances in future legislation. According to Priceline’s most recent financial statements, it no longer has to provide for a contingent liability in these matters.
An adverse outcome in one or more of these unresolved proceedings could have an adverse effect on our results of operations or cash flow in any given operating period. However, the Company believes that even if the Company were to suffer adverse determinations in the near term in more of the pending proceedings than currently anticipated, given results to date it would not have a material impact on its liquidity or financial condition.
What About The Customers?
The thing that annoys me about this litigation is that none of it is going to benefit the consumer. The OTCs do not charge their customers for the tax. They charge them for a tax recovery fee. Here is how Expedia explains it.
You acknowledge that except as provided below with respect to tax obligations on the amounts we retain for our services, the Expedia Companies do not collect taxes for remittance to applicable taxing authorities. The tax recovery charges on prepaid hotel transactions are a recovery of the estimated taxes (e.g. sales and use, occupancy, room tax, excise tax, value added tax, etc.) that the Expedia Companies pay to the hotel supplier for taxes due on the hotel’s rental rate for the room. The hotel suppliers invoice the Expedia Companies for certain charges, including tax amounts. The hotel suppliers are responsible for remitting applicable taxes to the applicable taxing jurisdictions. None of the Expedia Companies act as co-vendors with the supplier with whom we book or reserve our customer’s travel arrangements. Taxability and the appropriate tax rate vary greatly by location. The actual tax amounts paid by the Expedia Companies to the hotel suppliers may vary from the tax recovery charge amounts, depending upon the rates, taxability, etc. in effect at the time of the actual use of the hotel by our customers. We retain service fees as additional compensation in servicing your travel reservation. Service fees retained by the Expedia Companies for their services vary based on the amount and type of hotel reservation.
So if Expedia was estimating that it might have to pay more tax and now it turns out that it can pay less, it does not have to return anything to its customers. It is kind of ornery of me, but I really wish that somebody would bring a class-action lawsuit on behalf of the customers if, as seems likely, the ]tax recovery fees have to a greater or lesser extent just dropped to the OTC bottom line. I put it in the same class as that two gallons or so of gas left in the tank that the rental car company gets to sell over and over.
Other Coverage
The story is covered by California newspapers such as the LA Times, but I have not seen tax geeks weighing in much.