Extras on Excise: Federal Courts Say Online Travel Agencies Have No Duty to Collect Local Lodging Taxes



Online travel agencies won’t have to worry about collecting and remitting local lodging taxes after favorable decisions in two federal circuit courts in recent weeks.  

In Illinois, thirteen municipalities filed a class action against online travel agencies (OTAs) including Expedia, Priceline, Travelocity, and Orbitz, seeking to collect unpaid lodging taxes on the difference between the room rental rate and the contract price of the room. The federal district court granted the OTAs summary judgment against all the municipalities except one, as originally reported by Bloomberg Tax’s Michael Bologna. On appeal, the Seventh Circuit held in Vill. of Bedford Park v. Expedia that none of the OTAs have a duty to collect or remit the taxes. 

The circuit court examined the ordinances at issue by categorizing them into three groups: those that impose a duty to collect lodging taxes on hotel owners, operators, and managers; those that impose taxes on persons “engaged in the business of renting hotel rooms”; and those containing elements of both.

The court looked at the ordinances for seven municipalities that impose taxes on hotel owners, operators, and managers. The court held that the OTAs fall outside those classifications because they do not own the hotels and hotel rooms advertised on their websites, and have no right to possess, use, or convey the hotel rooms they contract with. They merely contract with hotels in order to allow customers to make reservations. OTAs are also not managers of hotels or hotel rooms because they do not administer or supervise the affairs of the hotels. Additionally, OTAs are not hotel operators because they “do not perform the function of running a hotel.” OTAs’ engagement in reserving rooms, processing monetary transactions, and handling related customer service does not make them hotel operators.

Next, the court reviewed the ordinances for three municipalities where the lodging tax is imposed on those engaged in the business of renting hotel rooms. The district court had denied summary judgment for two of the municipalities because although the OTAs were engaged in renting hotel rooms, the ordinances only tax gross rental receipts. These municipalities had already received taxes on the rental rate set by the hotel; thus, the OTAs could not be required to collect and remit taxes on the extra fees they charged to customers as part of their markup. The circuit court agreed with the prior determination and affirmed the judgment on both municipalities. 

Then the court examined the ordinance of the one municipality that had previously been granted summary judgment by the lower court, Lombard. 

The district court previously granted summary judgment to the municipality of Lombard because its ordinance imposed the tax on those engaged in the business of renting hotel rooms but did not specify that it applied only on gross rental receipts. The circuit court reversed summary judgment in favor of the OTAs because an OTA’s functions do not fit the meaning of “engaged in the business of renting” or “engaged in renting.” “[R]enting implies ownership and granting possession of property … OTAs do not own hotels or hotel rooms,” and therefore, cannot either rent hotel rooms to customers or be found to engage in the routine or commercial rental of hotel rooms.  

Lastly, for the three municipalities with ordinances that contain elements of both types of lodging taxes, the circuit court found that OTAs have no duty to collect and remit taxes. OTAs were found not to be hotel owners, operators, or managers, and also not engaged in the business of renting hotel rooms, for the reasons discussed above. 

In City of San Antonio v. Hotels.com, LP, the Fifth Circuit Court of Appeals determined that the service fees charged by online travel companies (OTCs) were not subject to local hotel occupancy taxes in 173 Texas municipalities. Specifically, the service fees charged by OTCs for expediting hotel reservations was found not to be included in the “cost of occupancy” for purposes of local hotel occupancy taxes. 

It should be interesting to see if federal courts stick to the findings of these recent decisions or find different methods of interpreting local lodging tax ordinances as they apply to OTAs and OTCs.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Should online travel agencies/companies collect lodging and hotel occupancy taxes on service fees?

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