Extras on Excise: Arizona Cities Obtain Coveted Victory Against Online Travel Companies in their Bid to Tax


The Arizona Court of Appeals has ruled that Phoenix and other Arizona cities can impose retrospective gross income privilege taxes against OTCs because they are brokers engaged in a taxable activity under city law. The decision continues the long line of cases pitting online travel companies (OTCs) against state and local governments.

In 2014, Arizona cities assessed business activity privilege tax against OTCs for an eight-year period between 2001 and 2009. The tax was assessed under the premise that OTCs were taxable under two ordinances. One ordinance imposes tax on “the gross income from the business activity upon every person engaging or continuing in the business of operating a hotel charging for lodging and/or lodging space.” The other imposes tax on “the gross income from the business activity of any hotel engaging or continuing within the City in the business of charging for lodging and/or lodging space furnished to any transient.” The OTCs sought redetermination of the assessments, and a hearing officer ruled in their favor, “finding that the OTCs are not engaged in the business of operating a hotel and are not brokers because they do not act for hotels in the operation of the hotel.”

On appeal, the superior court granted the cities’ motion for summary judgment on the question of whether they are subject to the 3 percent tax imposed on the gross income of hotels under Phoenix City Code section 14-447. The court also found that OTCs fit the definition of “broker” under the Phoenix code, making them liable for the tax imposed under Phoenix City Code section 14-444 with the caveat that the cities’ position on OTCs being brokers was a “new interpretation or application under the code.” Because of this, taxes could only be assessed going forward, thereby nullifying the assessments from 2001 through 2009. Both parties appealed to the Arizona Court of Appeals, with the cities appealing the portion of the ruling that only permitted prospective collection of the gross income tax.

The Arizona Court of Appeals affirmed the superior court conclusion that OTCs are hotel room brokers, and, as a result, are persons engaged in the business of operating a hotel that charges for lodging and liable for gross income tax on their business activities. City law indicates that brokers will be treated as taxpayers specifically “to prevent evasion of taxes imposed.”

The court reversed the superior court conclusion that cities could only assess the tax prospectively, stating that “failure to collect a privilege tax does not render an unambiguous statute unenforceable” and thus is insufficient evidence that the cities were advancing a new interpretation of the code. The appeals court also reversed the superior court’s ruling on summary judgment that OTCs were subject to the gross income tax imposed on hotels under Phoenix City Code section 14-447, finding that the ordinance’s “plain text limits the taxable income to business activities of hotels.”

The case was remanded to superior court for further proceedings. It is not clear whether either party will pursue further appeals.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Will OTCs press forward with an appeal to the Arizona Supreme Court? Should they? Why or why not?

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