Extras on Excise: Texas Cities Continue to Seek Unpaid Hotel Occupancy Taxes from Online Travel Companies

Nationwide, the legal battle between online travel companies (OTCs) and state and local revenue agencies continues to unfold over the collection, remittance, and proper tax base for hotel occupancy taxes. The central arguments in most of these cases hinge on whether OTCs, such as Expedia Inc., Hotels.com LP, Hotwire Inc., Orbitz LLC, and Travelocity.com L.P., are responsible for collecting and remitting hotel occupancy taxes, and whether OTCs’ service fees for facilitating hotel bookings are included in the amount subject to taxation. Ongoing litigation in Texas serves as a good case example of these common debates. 

Most OTC website prices include the agreed upon hotel-OTC “rate parity” markup fee—the difference between the retail price and wholesale rate—and the booking service fee. Under some taxing statutes, hotel operators are responsible for collecting and remitting taxes on the cost of the room and rate-parity fee, but OTCs are not required to remit taxes on the booking fees they charge. In Texas, this has caused numerous cities to file lawsuits against OTCs, seeking determinations on whether OTC service and booking fees are included the tax base subject to hotel occupancy taxes. 

In a lengthy dispute, beginning in 2009, a jury in City of San Antonio, Texas v. Hotels.com, LP decided in favor of the city of San Antonio, on behalf of a certified class of 172 other Texas cities, and awarded the cities a $20 million judgment for unpaid taxes and damages from 11 OTCs. The jury determined that the OTCs were “controlling hotels” relationships with consumers under the cities’ hotel occupancy tax ordinances. Both parties filed post-trial motions. 

Eventually, on April 11, 2016, the U.S. District Court for the Western District of Texas ruled that the OTCs exercised control over hotel rooms before the consumers checked in the rooms and increased the judgment to $84 million in underpaid hotel occupancy taxes. The District Court also determined that under the cities’ ordinances, the tax base includes the OTC rate parity markup paid to the OTCs by the consumers. The OTCs appealed this decision on Nov. 28, 2016, contending that they are merely providing information to travelers from hotels and not exercising control over hotels. In January 2017, the cities cross-appealed the penalties and post-judgment interest amount awarded to the cities.  

Most recently, during oral arguments on Sept. 26, 2017, the U.S. Court of Appeals for the Fifth Circuit suggested that the Texas Supreme Court should determine whether a merchant model arrangement existed between hotels and OTCs, thus requiring OTCs to collect and remit hotel occupancy taxes. The court also suggested that the Texas Supreme Court should rehear whether OTC fees are taxable under the City of Houston v. Hotels.com, LP decision. The appeal is still pending.

Continue the discussion on LinkedIn: Should states and municipalities impose hotel occupancy taxes on the entire amount charged by OTCs to consumers?

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