In a suit brought by the City of San Diego, the California Court of Appeal recently ruled that online travel companies (“OTCs”), such as Priceline, Expedia, Orbitz, and Hotels.com, only need to collect and remit San Diego’s transient occupancy tax on the amount the OTCs pay to the hotels – not on the amounts the OTCs receive from consumers. In re. Transient Occupancy Tax Cases, No. B243800 (Cal. Ct. of App., 2nd Dist., Mar. 27, 2014).

As explained by the Court, the OTCs contract with hotels for the right to advertise and sell rooms to the general public. The hotels charge the OTCs a wholesale price for the rooms, and the OTCs then offer those rooms to the general public at higher retail prices, which include a fee for the OTCs’ services as well as an estimate of the transient occupancy tax based on the wholesale price.

In its decision, the Court ruled that the ordinance did not express an intent to impose a tax on the service fees and markups charged by the OTCs. Rather, the basis for the tax was the amount charged by the hotel operator. And, because OTCs are not hotel operators, the tax was properly based on the wholesale price.

The decision conforms with courts in other states, which have addressed the same issue and generally concluded that the online companies are not hotel operators for purposes of locally imposed hotel taxes.