Sales Tax Slice: The $61 Million Deal - The District of Columbia and Online Travel Companies Reach Historic Settlement Over Unpaid Hotel Taxes

About a month from now, Washington D.C. will play host to tens of thousands of tourists intent on taking in the magnificence of the cherry blossoms in peak bloom. While they are there, many of them will stroll around the tidal basin en route to the Jefferson Memorial. Others will venture across the National Mall, past the Washington Monument and the Lincoln Memorial, on their way to catch a glimpse of the White House.  These tourist attractions and others are the reason why visitors travel to our nation’s capital in between presidential inaugurations. 

Over the past decade, the emergence of electronic commerce has simplified booking vacations down to a couple clicks of a mouse. Indeed, every spring (or late winter, depending on where you’re from), a majority of those tourists or cherry blossom enthusiasts make their travel arrangements via an online travel company. Further, online travels companies (OTCs) such as Orbitz, Expedia, and Travelocity even cater to consumers with a specific travel agenda and sell packages that provide them with their perfect customized D.C. vacation. 

While OTCs likely turn a decent profit from selling these, and other, travel packages, a settlement agreement announced on February 24 between the D.C. government and six of the major OTCs to resolve the district’s claims of underpayment of hotel-room taxes will hit those OTCs hard in the wallet – to the tune of $60.9 million, plus interest, a historic amount.

OTCs have become the online version of the traditional travel agent. OTCs will reserve flights, hotels, rental cars, even travel-related activities as part of a single-priced package. For hotel booking purposes, OTCs play the role of “middle man” between the hotel and the consumers, acquiring rooms at a wholesale cost and charging a retail price to consumers.

However, unbeknownst to most consumers, the battle over the proper application of state and local hotel occupancy taxes, as well as related sales and excise taxes, on OTCs has been waged in state and federal courts. At the center of nearly a decade’s worth of litigation is the question of whether to impose and collect the tax based on the lower wholesale amount the OTC pays the hotel for the room, or the amount the consumer pays, including any extra “facilitation” fees, to the OTC.

While these cases may not have registered on the average consumer’s radar, the D.C. agreement grabbed headlines because of the magnitude of the settlement amount. Indeed, the $61 million not only represents the largest monetary recovery in D.C. history through a case the city litigated, but also the largest settlement that OTCs have agreed to pay in almost a decade of litigating these claims in dozens of jurisdictions around the country.

However, at least for the time being, the D.C. government is (or should be) holding off on its celebration. The agreement, while historic and monumental, stems from a favorable 2012 D.C. Superior Court ruling for the city and is contingent upon the ruling being upheld on appeal. Specifically, in September 2012, the superior court granted summary judgment in favor of the city, finding that each OTC “is required by District law to collect and remit sales taxes based on the retail prices that the [company] charges website customers for hotel rooms in the District of Columbia.” Further, the court found that the OTCs were liable for potentially millions of dollars in unpaid hotel-related sales taxes owed to the city dating back more than a decade.  At that time, however, the exact amounts allegedly owed by the OTCs were still pending.

Thus, the $61 million settlement is contingent upon the D.C. Court of Appeals affirming the superior court’s 2012 ruling.  In April 2011, D.C. amended its sales taxes statute to require OTCs to pay tax based on the full price that consumers pay via OTC websites for hotel room rentals, a combined rate which amounts to 14.5 percent.*

Such a ruling by the appeals court would mark a significant victory not only for D.C., but for states and localities in their ongoing, and often contentious, battle over enforcement of their hotel occupancy tax laws. 

OTCs, on the other hand, will likely live to fight another day. In fact, OTCs, to date, have been successful in arguing that they only provide a booking service that facilitates the traditional hotel transaction model – meaning a hotel guest contacts the hotel to book a room and then directly pays the hotel for the accommodations. Accordingly, OTCs have successfully argued that since they do not own, operate, or manage any of the hotel buildings, they often do not constitute a taxable person under the relevant statutory definitions.

With litigation ongoing in a multitude of jurisdictions around the country, OTCs and states and localities are digging in their heels on this issue, and for good reason. Not only are potentially millions of dollars of unpaid taxes at stake, but even more money from future revenue collections hang in the balance. 

Ultimately, however, it is the consumer that will likely feel the effects of an anticipated D.C-type resolution. Not only will consumers be on the hook for the extra taxes, but they might also expect extra “fees” charged by OTCs for administrative costs for any additional collection and remittance measures that may be required. Accordingly, a trip to see the cherry blossoms or any other D.C. attraction might cost you a bit more should you attempt to find a deal by using an OTC.

Continue the discussion on the BBNA State Tax Group on LinkedIn : What sort of any impact, if any, will the D.C. settlement agreement have on other OTC-related litigation? 

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*In the original version, this post said the following: “Should the appeals court uphold the ruling, not only will OTCs pay the settlement amount, but moving forward, they will also be liable to pay the district’s sales taxes on hotel room rentals, a combined rate which amounts to 14.5 percent.”  The requirement that OTCs pay future hotel taxes in D.C. is not contingent on the appellate court upholding the superior court’s ruling.  The superior court’s ruling and the settlement agreement pertain to back taxes, not future taxes.