The multi-year bat­tle be­tween on­line travel com­pa­nies (OTCs) and state and lo­cal tax­ing au­thor­i­ties con­tin­ues through­out the United States. Un­der dis­pute is whether li­a­bil­ity for sales and ac­com­mo­da­tion taxes should be based on the dis­counted rate that the OTCs pay ho­tels to ac­quire room in­ven­tory or the marked-up rate that OTCs charge cus­tomers. Mil­lions of dol­lars are at risk for the OTCs and the tax­ing au­thor­i­ties.

Court De­ci­sions Are A Mixed Bag

Pre­vi­ous lit­i­ga­tion has not yielded a clear win­ner as courts must de­cide each case based upon the vary­ing tax laws of each ju­ris­dic­tion. As il­lus­trated by two note­wor­thy de­ci­sions in 2011, this pat­tern con­tin­ues to hold.

In South Car­olina, the Supreme Court up­held a multi-mil­lion dol­lar sales tax as­sess­ment against Trav­elscape, a wholly-owned sub­sidiary of Ex­pe­dia. In South Car­olina, the ap­plic­a­ble tax is not only levied on those who phys­i­cally sup­ply sleep­ing ac­com­mo­da­tions, but also on those that ac­cept money in ex­change for sup­ply­ing ho­tel rooms. The Court found that Trav­elscape was re­spon­si­ble for the tax on the full amount it re­ceived from its cus­tomers as it ac­cepted money in ex­change for sup­ply­ing ho­tel rooms.

In Florida, a Cir­cuit Court de­nied a mo­tion for sum­mary judg­ment by Or­ange County in its suit against Ex­pe­dia and Or­b­itz. In deny­ing the mo­tion, the Court (like many other courts) found that the ap­plic­a­ble tax law was un­clear as to whether it ap­plied to the in­ter­net busi­ness trans­ac­tions en­gaged in by Ex­pe­dia and Or­b­itz as these types of trans­ac­tions were not con­tem­plated at the time the tax law was drafted and en­acted.

Do the Leg­is­la­tures Hold The Trump Card?

State and lo­cal gov­ern­ments through­out the United States are work­ing to up­date their tax laws to take into ac­count the OTC busi­ness model ei­ther for proac­tive rea­sons or in re­sponse to un­fa­vor­able court de­ci­sions. Per­haps most in­ter­est­ing, North Car­olina amended its tax laws on a prospec­tive ba­sis ef­fec­tive Jan­u­ary 1, 2011 to re­quire the OTCs to pay sales and ac­com­mo­da­tions taxes on the full amount that they re­ceive from their cus­tomers. The ac­tion was in re­sponse to a court de­ci­sion un­fa­vor­able to the state. As re­ported by David Bracken at the News Ob­server, a num­ber of the OTCs have filed a law­suit at­tempt­ing to block the ap­pli­ca­tion these new tax laws.

We must now wait and see whether the OTCs or the tax­ing au­thor­i­ties will emerge vic­to­ri­ous from this lat­est round, and whether it will in fact be the last round in this long bat­tle.

Thank you to Beat­rice Larkin for her as­sis­tance with this post­ing.