Was the City of New York authorized to amend the hotel occupancy tax to cover revenue from fees charged by “online” booking services? Answer: Yes.

In Expedia, Inc. v. City of New York Dept. of Fin., 2013 NY Slip Op 07759, the Court of Appeals addressed the constitutionality of a New York City law that imposed a hotel room occupancy tax on online travel companies.

According to the Court of Appeals:

The New York City Council, in 2009, amended an existing law to impose a tax to capture revenue from fees charged to customers as rent by third party travel companies, known under the law as “room remarketers” (Local Law No. 43 [2009] of City of New York § 1). Local Law 43 defined “rent” as: “[t]he consideration received for occupancy valued in money, whether received in money or otherwise, including all receipts, cash, credits, and property or services of any kind or nature, including any service and/or booking fees that are a condition of occupancy[.]” (id. [emphasis added]). Thus, Local Law 43 taxed the total rent or charge paid by a hotel occupant, including sums paid directly to third parties. Id. at 2-3.

Plaintiff travel companies “brought a declaratory judgment action in Supreme Court challenging the constitutionality of the tax. Alternatively, plaintiffs argued that the law did not apply to them because their service fees [were] not ‘rent’ within the meaning of the state enabling legislation.” Id. at 3.

[The] Supreme Court granted the City’s motion to dismiss; and the Appellate Division reversed on the ground that: “the enabling legislation did not ‘clearly and unambiguously provide the City with broad taxation powers’ to tax the plaintiffs’ fees (Expedia, 89 AD3d at 641). Construing the enabling statute narrowly, the Appellate Division concluded that taxing remarketers’ fees was beyond its scope, and held that the City’s tax was unconstitutional (id.).” Id.

While the appeal was pending before the Appellate Division, “the State Legislature’s 2010 budget law explicitly authorized the City’s tax on hotel remarketers (L 2010 ch 57, pt AA, §§ 6-11). Thus, [the appeal before the Court of Appeals], like the case before the Appellate Division concern[ed] only the City’s power to tax during the period between the 2009 enactment of Local Law 43 and the 2010 budget legislation.” Id.

The Court of Appeals concluded that:

Here, the Legislature granted the City broad authority to enact an occupancy tax, and the City properly exercised that authority. The enabling statute extended to the City a taxing power coextensive with that of the State (CLS Uncons Law of NY, ch 288-c, § 1 [1]; cf. People v. Cook, 34 NY2d 100, 111-112 [1974]. Moreover, the statute authorized a broad range of taxation. Under the statute, the City may tax a “rent or charge,” and it may collect the tax from a hotel “owner…or…person entitled to be paid the rent or charge” (CLS Uncons Laws of NY, ch 288-c, § 1 [3] [emphasis added]). Nonetheless, the Legislature set constitutionally appropriate limitations on the enabling grant: the City may only tax the “rent or charge” paid for hotel occupancy (Id.). Although not defined in the enabling act, hotel “rent” generally means “the consideration received for occupancy” (Tax Law § 1101 [c][6]), and, following noscitur a sociis [a word is known by the company it keeps], “charge” must also refer to a fee paid for occupancy. Under the enabling grant, the City enacted a tax on third-party fees that are made “a condition of occupancy” (Local Law No. 43 [2009] of City of New York § 1). In other words, the City enacted a tax on a hotel rent or charge. Id. at 5.

Explaining the rational for the decision, the Court of Appeals concluded that:

Online travel companies like the plaintiffs have successfully reshaped the way people book travel. Now, a customer can conveniently and efficiently search the plaintiffs’ websites for a hotel room and reserve it with the click of a button. While it may no longer seem novel to reserve a hotel room online, this innovation revamped the industry, and the industry players have reaped considerable profits. However, this innovation has not changed the main purpose of a hotel reservation process: selecting and paying for a room for future occupancy. Local Law 43 adheres to its enabling purpose, the taxation of hotel occupancy rent and charges, by taxing everything a hotel occupant actually pays for occupancy when booking online. Id. at 5-6.