Online Travel Companies Prevail in $84 Million Texas Tax Dispute

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By Paul Stinson

Online travel companies won another victory, this time in Texas, against municipalities seeking millions of dollars in unpaid hotel occupancy taxes, after a federal appeals court found their local ordinances impose no duty to collect and remit such taxes on the e-commerce firms.

The U.S. Court of Appeals for the Fifth Circuit Nov. 29 vacated an April 2016 judgment by a lower court, finding in favor of the travel websites operated by Hotels.com LP, Hotwire Inc., Expedia Inc., Orbitz LLC, and Travelocity.com L.P. in litigation with 173 Texas municipalities City of San Antonio, Texas v. Hotels.Com, L.P. , 5th Cir. App., No. 16-50479, 11/29/17 .

The OTCs asked the appellate court during Sept. 26 oral arguments to undo an earlier ruling handed down by the U.S. District Court for the Western District of Texas, holding that they were liable for $84 million in hotel occupancy taxes, penalties, and interest.

Central to the issue was whether the service fee an OTC charges for facilitating a hotel reservation is included in the “cost of occupancy” and thereby subject to the municipalities’ hotel occupancy tax ordinances.

“Cities concede OTCs have been collecting taxes on the discounted room rate paid to the hotel, and the hotels have been remitting them,” Judge Rhesa Hawkins Barksdale wrote on behalf of the three-judge panel.

“Because the only monetary amounts at issue in this class action are those not included in the scope of the hotel occupancy tax base, OTCs are not liable,” Barksdale added.

Follows OTC Illinois Win

The ruling marks the latest finding in favor of OTCs in the hotel tax arena. A Nov. 22 ruling from the U.S. Court of Appeals for the Seventh Circuit found that travel websites operated by Expedia, Priceline.com Inc., Travelocity.com and Orbitz had no duty to collect local lodging taxes for 13 Illinois municipalities.

The Texas decision “doesn’t surprise me as it’s how most other courts have ruled on it,” Joseph Bishop-Henchman, executive vice president at the Tax Foundation, told Bloomberg Tax.

“If a state wants to pass a law extending their sales tax to all services, that’s one thing,” Bishop-Henchman said in a Nov. 30 email. “But this was an effort to single out one service, primarily used by people out of state, for a specially high tax rate.”

“Judges haven’t looked kindly on legal sophistry saying online travel should pay tax on their services while other services don’t,” he said.

‘Control Factors’

Lead counsel for the Texas municipalities asserted during Sept. 26 oral arguments that the online companies convey a right to occupancy and are subject to tax liability. OTCs “do have occupancy to settle, they do collect taxes, they do have their own cancellation policies—all of those control factors, all of those factors that go to what is occupancy,” Gary Cruciani, principal at McKool Smith, argued before the court.

A legal representative for the City of San Antonio told Bloomberg Tax that further action is under consideration following the ruling.

“We are disappointed with the 5th Circuit’s decision,” City Attorney Andy Segovia said in a Nov. 30 emailed statement. “We are exploring our options,” he added.

Counsel representing the other cities didn’t immediately respond to a request for comment on the court’s ruling. The Texas Municipal League said it wasn’t immediately available to offer comment.

To contact the reporter on this story: Paul Stinson in Austin, Texas at pstinson@bloomberglaw.com

To contact the editor responsible for this story: Cheryl Saenz at csaenz@bloombergtax.com

For More Information

Text of the decision is at http://src.bna.com/uBn.

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