Extras on Excise: Online Travel Company Litigation Continues to Capture Our Attention

As we close the book on the first quarter of 2014, it feels like an appropriate time to take a step back and review how online travel company litigation has shaken out thus far. For nearly a decade, the battle over the proper application of state and local hotel occupancy taxes, as well as related sales and excise taxes, on online travel companies (OTCs) has been waged in state and federal courts. 

That’s right, nearly 10 years. That’s not a misprint or a lame attempt at an April Fool’s Day joke. That means that the often costly and contentious litigation predates the smart phones and tablets that frequently make booking vacations via OTCs’ applications so convenient and attractive. 

OTCs (e.g. Orbitz, Travelocity, Priceline, Expedia) play the role of “middle man” between the hotel and consumers. They acquire rooms at wholesale prices and charge retail rates, including “facilitation” fees, to consumers. At the center of this ongoing and extensive battle is whether to impose hotel-related taxes based on the lower wholesale amount that OTCs pay the hotel or the amount the consumer pays the OTC to rent the room.

Over the first quarter of 2014, we’ve seen numerous outcomes in cases spanning from California to Florida. As many expected, they have been conflicting. Indeed, based on that sample size, we may still be tracking these developments on April Fool’s Day in 2024.  

In February, in Broward County. V. Orbitz, LLC, No. 1D13-543 (Fla. Dist. Ct. App. Feb. 12, 2014), the Florida First District Court of Appeal affirmed a lower court’s 2012 ruling that OTCs do not owe local tourist development taxes (TDT) on the full price of hotel rooms reserved through OTC websites.  Specifically, the court ruled that the TDT was imposed on “the privilege of renting out rooms,” which means, in essence, “a tax on the hotelier for the privilege of engaging in that business.” 

Similarly, in March, a Montana District Court judge ruled that the state’s lodging facility use tax and the related sales tax on accommodations is imposed on the fee charged by the owner or operator of the facility, not on intermediary services like those provided by OTCs. According to the court, the tax is imposed on the user of the lodging and is based on the accommodation charge, which is the fee charged by the operator of the facility. Thus, in Montana Dept. of Rev. v. Priceline.com Inc., No. CDV-2010-1056 (Mont. D. Ct. March 6, 2014), the court ruled that because the OTC does not control the physical aspects of the facility or accommodations, it falls outside the plain language of the statute.

In addition, a California appellate court, as it has in on two other occasions, ruled that since OTCs are not “operators” under the relevant ordinance, the “facilitation” fee that OTCs charge its customers is not subject to the transient occupancy tax (TOT).  Specifically, in In re Transient Occupancy Tax Cases, No. B243800 (Cal. Ct. App. March 27, 2014), the court determined that the TOT is imposed based on “the rent charged by the (hotel) operator,” and accordingly refused to enlarge the scope of the TOT to account for the services provided by OTCs.

However, in City of San Antonio v. Hotels.com, L.P. et al., No. 5:06-cv-00381 (W.D. Tex Feb. 20, 2014), a federal judge, in denying the OTCs motion for a new trial and their motion for judgment as a matter of law, reaffirmed the court’s ruling that OTCs exercise sole control over the hotel reservation transaction and thus owe taxes on the full amount paid by the customer.

Settlements also emerged from ongoing litigation in the District of Columbia and Maryland. In District of Columbia v. Expedia, Inc., No. 2011 CA 002117 (D.C. Super. Ct. Feb. 24, 2014), six OTCs and the D.C. government entered into a settlement agreement in which OTCs will pay a total of $60.9 million plus interest to resolve claims that OTCs underpaid tens of millions of dollars in hotel occupancy taxes over a decade. The agreement, however, is contingent upon an appellate court upholding a D.C. Superior Court judgment in favor of the district and against OTCs.

In Montgomery County, Md. v. Priceline.com Inc., No. MJG-10-3558 (D. Md. March 14, 2014), an undisclosed agreement between Montgomery County, Maryland and Travelocity.com effectively ended the long legal fight over the proper application of hotel occupancy taxes.

As these case reveal, neither side appears to be backing off. With potentially billions of dollars in past and future collections at stake, these matters and others will likely remain a fixture for years (or decades) to come.

Continue the conversation on Bloomberg BNA’s State Tax Group’s LinkedIn page: Will OTC litigation continue to dominate court dockets in 2014 and beyond?

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