Orbitz Tax Assessment Tossed in Indiana

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By Michael J. Bologna

The Indiana Tax Court handed another victory to online travel companies in their battle with municipal and state revenue agencies, ruling that Orbitz LLC isn’t liable for a sales tax and innkeeper’s assessment levied by the Indiana Department of Revenue ( Orbitz LLC v. Ind., Dep’t of State Revenue , Ind. T.C., No. 49T 10-0903-TA-00010, 12/20/16 ).”

Judge Martha Blood Wentworth on Dec. 20 found no basis for affirming an Indiana revenue department assessment of $200,000 imposed in December 2007. Wentworth ruled that Chicago-based Orbitz couldn’t be characterized as a “retail merchant” under state law and couldn’t be held responsible for any taxes on the “mark up”—the difference between the wholesale room rate charged by hotels to Orbitz and the retail rate paid by customers to Orbitz.

The ruling, however, included a determination that could impact Orbitz’s checkbook.

On a separate question of the proper measure of the tax base for the transactions in question, Wentworth ruled any additional assessments of sales or innkeeper’s taxes that might be due should be assessed against the hoteliers as the proper retail merchants. That determination could be meaningful because most major hotel chains have for many years required the OTCs to enter into agreements that indemnify them against adverse tax rulings.

“During the period at issue, the Department erred in issuing sales and innkeeper’s tax assessments against Orbitz based on the retail rate of Indiana hotel rooms as a matter of law because the hoteliers, as the retail merchants, were liable for the taxes, not Orbitz,” Wentworth wrote.

It was unclear how Indiana would respond to the ruling. A spokesperson for the Indiana revenue department didn’t immediately respond to a request for comment. An attorney representing Orbitz declined to comment.

Similarities to California Ruling

The decision reflected themes found in a major ruling by the California Supreme Court last week ( In re: Transient Occupancy Tax Cases, Cal., No. S218400, 12/12/16 ).

The California high court Dec. 12 refused to endorse the City of San Diego’s $21.2 million assessment against several OTCs for allegedly unpaid transient occupancy taxes (TOTs). Among other things, the court found no basis by which the OTCs could be characterized as “hotel operators” under the TOT statute, leaving them harmless for any taxes on the markup fees.

At the same time, the California high court clarified that any costs added to the wholesale price of a hotel room remain taxable under the TOT and that the liability rests with the hotel operator.

Next Steps?

The tax dispute goes back almost a decade, when the department investigated Orbitz’s tax practices with regard to the state’s 6 percent sales tax and several counties’ lodging taxes. An investigative report was eventually issued, seeking unpaid tax for the period between Jan. 1, 2004, and Dec. 31, 2006. The department sought more than $200,000 plus interest, alleging Orbitz should have collected taxes based on the retail rate for each room rented rather than the wholesale rate hotels charged to Orbitz.

The department denied subsequent protests by Orbitz, triggering an appeal to the tax court.

On appeal, the court was asked to determine whether the department had “erred in assessing additional sales and innkeeper’s taxes against Orbitz based on the retail rate of Indiana hotel rooms rather than on the wholesale rate that Orbitz used.”

To answer the question, Wentworth said the court needed to determine if Orbitz could be considered a retail merchant and the proper measure of the tax base.

Wentworth found no basis for the revenue department’s assertions that Orbitz could be considered a retail merchant. She said the facts in the case establish that the hoteliers “delivered or transferred possession and control of hotel rooms to customers during the check-in process,” not Orbitz. In this context, she said the e-commerce company isn’t a retail merchant under the state tax code.

Wentworth also determined that only the hotels, as retail merchants, could be held liable for “any additional assessments of sales or innkeeper’s taxes that might be due.”

To contact the reporter on this story: Michael J. Bologna in Chicago at mbologna@bna.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bna.com

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