We reported on the tax disputes between online travel companies (OTCs) and various state and municipal tax agencies back in February and April. We thought it was time to catch up on what was going on when we saw this headline from HotelNewsNow:
HNN was reporting on the Findings of Fact and Conclusions of Law just issued by the judge presiding over a class action brought by the City of San Antonio and 172 “similarly situated” Texas cities. Back in November of 2009, a federal jury found that, for purposes of the tax statutes under examination, Expedia, Priceline, Orbitz and Travelocity “control hotels” and, as a consequence, were responsible for $20.6M in unpaid hotel occupancy taxes.
Despite the jury verdict, several discreet legal issues remained for resolution by the court. After reviewing the evidence in detail, the court made several findings. The most notable are described below:
What Is Taxed?
After considering the facts and arguments presented, the court concluded that:
- Each of the 173 taxing ordinances “impose a hotel occupancy tax on the consideration paid by the occupant for the cost of occupancy of a sleeping room furnished by a hotel.”
- “Because the OTC’s are not occupants, they never have the right of occupancy, and the wholesale rate they pay for the right to sell a hotel room is not consideration paid for the right of occupancy, there is absolutely no reason for hotel occupancy taxes to be imposed on wholesale rates paid by the OTC to the hotel.”
- “While the OTC’s may provide a service in handling the transaction with the consumer/occupant, the OTC’s markup and service fees are part of the total retail amount paid by the consumer to the OTC for the right of occupancy. If the consumer refused to pay any part of the retail amount charged by the OTC, he would not have a prepaid reservation and he would not have the right to occupy the hotel room."
Based on these conclusions, the court held that “the total retail price is the amount that must be paid by the consumer for the right to occupy a hotel room, and that is the amount that is taxed under the ordinances.”
How Should Breakage Revenue and Cancellation Fees Be Treated?
The court concluded that, notwithstanding a “no-show,” the consumer “clearly pays [the OTC] for the right to occupy a hotel room at the time he books and pre-pays for that room.” Further, the amount of payment includes a portion allocable to hotel occupancy taxes. As a consequence, irrespective of any breakage, “upon payment by the consumer, the OTC as tax collector has a duty to remit those tax monies to the City.”
However, the court determined that the payment of cancellation fees are a “completely separate transaction that a consumer pays to the OTC to avoid the cost of occupying a room.” As such, cancellation fees are not subject to hotel occupancy taxes.
Must the Amount Allocable to Taxes Be Separately Stated?
The court noted that, typically, the fees charged to a consumer by an OTC are bundled rather than separately itemized. However, the court found that the consumer would benefit from unbundling and that there is “no reason” for the OTC’s to “keep the amount of hotel occupancy taxes hidden” if the tax is assessed against the total retail rate charged by the OTC. As a consequence:
The OTC’s must be fully transparent about the amount of taxes being assessed in every consumer transaction. The OTC’s must clearly state the amount of the hotel occupancy taxes being assessed on the retail price that the consumer/occupant/taxpayer is being charged for the right to occupy a hotel room.
What Does it Mean?
While the Texas judge's findings are full of eye-catching details, it doesn't mean we are backing off our statement back in February that the court decisions are a mixed bag. Another Texas city, Houston, had its tax claims dismissed on summary judgment back in early 2010. In Anaheim, the OTCs were successful in reversing another $20+M decision. And as demonstrated by an unanimous Missouri Supreme Court decision issued on June 28, OTC lobbying efforts could prove to have retrospective benefits.
What we do know is that the litigation isn't going away anytime soon. For proof, check out this statement in Expedia's most recent 10Q:
Seventy-two lawsuits have been filed by cities and counties involving hotel occupancy taxes. . . . To date, twenty-four of the municipality lawsuits have been dismissed. Most of these dismissals have been without prejudice and, generally, allow the municipality to seek administrative remedies prior to pursuing further litigation. Twelve dismissals were based on a finding that we and the other defendants were not subject to the local hotel occupancy tax ordinance or that the local government lacked standing to pursue their claims.