Extras on Excise: Another Victory for Online Travel Companies


In an ongoing bout between state and local revenue agencies against online travel companies (OTCs), the California Supreme Court recently ruled that OTCs–including Orbitz LLC, Priceline.com Inc., Expedia Inc., Travelocity.com LP and others–are not liable for hotel occupancy taxes. The ruling came in a lawsuit by the City of San Diego against the OTCs, seeking a $21.2 million assessment for unpaid transient occupancy taxes.

The issues before the court were: (1) whether the San Diego ordinance imposes taxes on OTCs, and (2) if so, whether the taxes charged by the City are based on the amount that an OTC charges a consumer or the amount that the OTC pays the hotel operator.

San Diego’s ordinance imposes transient occupancy taxes on “the rent charged by the operator,” with the operator being “the person who is the proprietor of the Hotel,” including “a managing agent, a resident manager, or a resident agent, of any type or character, other than an employee without management responsibility.” The court concluded that OTCs are not operators within the meaning of the ordinance.

OTCs do business under a merchant business model, where the operator is liable for tax on the wholesale cost “plus any additional amount for room rental the operator requires the OTC to charge the visitor under what have been termed the ‘rate parity’ provisions of hotel-OTC contracts,” the court said. Therefore, San Diego cannot levy transient occupancy taxes against OTCs because “the words of the ordinance do not reveal an intent to impose a tax on the service fees and markups charged by the OTCs.” 

Michael Colantuono, special counsel to the California State Association of Counties, predicts that many municipalities will amend their ordinances to capture the full amount of transient occupancy taxes, as reported in an article by Michael J. Bologna in Bloomberg BNA’s Daily Tax Report.

This decision may turn out as a false victory for OTCs because, while the ruling says that OTCs are not liable for transient occupancy taxes under the City ordinance, major hotel chains may review and amend their contracts with OTCs to require OTCs to absorb the tax liability on any “rate parity” markups in the future.

California’s holding parallels Indiana Tax Court’s recent decision to grant Orbitz’s motion for summary judgment, finding that Indiana law does not classify Orbitz as a “retail merchant.” The court determined Orbitz was not liable for Indiana sales and innkeeper’s taxes on the retail rate of hotel rooms.   

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Should hotel occupancy taxes be calculated using the wholesale cost of hotel rooms charged by hotels, instead of the amount OTCs charge customers, which includes the “rate parity” markup?

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