In the latest development in the ongoing battle between Nassau County and online hotel retailers over hotel tax, the Appellate Division reversed the lower court’s grant of class certification for Nassau County and over 50 New York local government entities. Cnty. of Nassau, etc., v. Expedia, Inc. et al., 2014 N.Y. Slip Op 06050 (2d Dep’t, Sept. 10, 2014). In a separate opinion released on the same date, the Appellate Division also reversed the lower court’s findings and held that Nassau County failed to adequately plead a cause of action to impose a constructive trust against the online hotel retailers, but affirmed the lower court’s finding that the county adequately pled causes of action to recover damages for conversion and unjust enrichment. Cnty. of Nassau v. Expedia, Inc., 2014 N.Y. Slip Op 06049 (2d Dep’t, Sept. 10, 2014).
Nassau County, like many localities in New York and throughout the country, imposes a hotel tax, pursuant to enabling legislation, on the daily rental rate for each room rented in the county. A person failing to timely pay the hotel tax is also subject to a 5% penalty. The law provides that “[s]uch tax shall be paid by the person liable therefor to the owner of the hotel . . . or to the person entitled to be paid the rent or charge for the hotel or motel room. . . .” Nassau Cnty. Hotel Tax Law § 3(d) (emphasis added). Based on this statutory language, Nassau County brought an action against online hotel retailers, alleging that they are liable for the hotel tax and that such tax is calculated on the “retail” amount the online hotel retailer charges its customers, not the “wholesale” amount that the online retailer pays to the hotel.
Unlike the New York City hotel tax, the Nassau County hotel tax does not contain an administrative appeal provision. As a result, actions to recover the tax are brought in court, rather than first being heard by the Tax Appeals Tribunal. Nassau County filed its initial complaint over seven years ago in the United States District Court for the Eastern District of New York. Cnty. of Nassau v. Hotels.com, 594 F. Supp. 2d 251 (E.D.N.Y. 2007), vacated, 577 F.3d 89 (2d Cir. 2009). Although Nassau County successfully appealed the District Court’s dismissal of the complaint on grounds of lack of subject matter jurisdiction to the Second Circuit, the case was ultimately dismissed in 2011 without prejudice by stipulation of the parties. Nassau County then refiled its complaint in Nassau County Supreme Court. The court granted the county’s motion for an order certifying the action as a class action and denied the online hotel retailers’ motion to dismiss the county’s complaint for failure to state a cause of action. Cnty. of Nassau v. Expedia, Inc., 41 Misc. 3d 626 (N.Y. Sup. Ct., Apr. 11, 2013). The Appellate Division, Second Department, in two separate opinions, has now reversed the grant of class certification and reversed the denial of the motion to dismiss Nassau County’s cause of action to impose a constructive trust.
With respect to the first issue, the Appellate Division found that pursuant to the New York Rules of Civil Procedure, an action “to recover a penalty” may not be maintained as a class action. Since Nassau County was required to recover a penalty equal to 5% of the amount of the tax under the law, the Second Department held that it could not obtain certification as a class.
With respect to the second issue, the Appellate Division held that Nassau County failed to adequately plead a cause of action to impose a constructive trust because it did not allege the existence of a confidential or fiduciary relationship between the county and the online hotel retailers, which is one of the four elements a plaintiff must demonstrate in order to obtain the remedy of a constructive trust.
While the issue of whether a municipality may bring a class action suit to collect hotel tax on behalf of other municipalities appears to be one of first impression under New York State law, the issue of whether online hotel retailers must pay hotel tax on the full amount they charge consumers has been the subject of considerable litigation. In November 2013, the Court of Appeals reversed the Appellate Division, First Department, and held that the imposition of New York City hotel tax on the service and booking fees earned by online hotel retailers was not unconstitutional because the enabling legislation granted the City broad authority to impose an occupancy tax. Expedia, Inc. v. City of New York Dep’t of Fin., 22 N.Y.3d 121 (Ct. App. 2013). New State legislation explicitly imposing City hotel tax (and State and local sales tax on hotel occupancies) later went into effect, but it does not apply to locally imposed and administered hotel taxes such as the Nassau County hotel tax. Amendments Affecting the Application of Sales Tax to Rent Received for Hotel Occupancy by Room Remarketers, TSB-M-10(10)S (N.Y.S. Dep’t of Taxation and Fin., Aug. 13, 2010). Whether the New York courts will hold that Nassau County may impose hotel tax on the full amount charged by online hotel retailers remains to be seen.