Sales Tax Slice: A Long,Strange Trip? Figuring Out Tax on Online Travel Company Transactions


Online travel companies (OTCs) have simplified travel arrangements down to a couple clicks of a mouse. Indeed, websites such as Expedia, Orbitz, Priceline, and Travelocity, among others, are a one-stop shop for all your travel accommodations. OTCs will take care of it all – flights, hotels, rental cars, even activities can all be booked or reserved as part of a single-priced package. Heck, if that’s not convenient enough, Kayak.com is a popular website dedicated exclusively to comparing the pricing of OTCs – all users need to do is punch in travel dates along with a destination and the site will take care of that onerous task of price shopping.

As a “middle man” for hotels, airlines, etc., OTCs acquire rooms or flights at a wholesale rate and charge a retail price to consumers. In addition, facilitation fees, service fees, commissions, and markups are included in the amount paid by consumers to OTCs.

However, a persisting issue arising in many states concerns the application of sales and use or occupancy taxes to transactions involving OTCs and hotels. Specifically, the issue is whether tax should be collected based on the amount the OTC pays the hotel for the room, or the amount the consumer pays, including fees, to the OTC. 

In response, a few states have passed legislation addressing the taxability of OTCs. For example, pursuant to recently passed legislation in Arizona, qualified OTCs are specifically exempted from the state’s transaction privilege tax. However, according to Minnesota legislation passed in 2011, an “accommodations intermediary service” that facilities lodging, which includes OTCs, is specifically subject to tax. 

In addition, recent lawsuits have been filed by various cities and counties that have prompted many states to re-examine how their respective taxes apply to transactions involving OTCs. Not surprisingly, many of the outcomes have produced varying conclusions and unsettled issues concerning the application of such taxes.

Last year, the Alabama Supreme Court ruled that OTCs were not subject to state or local lodgings taxes because there were not engaged in the business of renting or furnishing hotel rooms. Similarly, the Missouri Supreme Court affirmed a circuit court’s dismissal of a lawsuit filed against several OTCs on the finding that the obligation to file the tax was on those engaged in operating a hotel room, not on the OTCs. Other pro-OTC court rulings have also been issued in Tennessee, Ohio, New Mexico, Kentucky, and Pennsylvania.

In addition, California courts have likewise consistently held that the state’s transient occupancy tax is due on the amount received by the hotel and not on the amount received by the OTC. Similarly, the Virginia Tax Commissioner has advised that, because an OTC does not own, nor does it operate the hotel where the transient accommodations are furnished, the hotel, not the OTC is required to collect and remit the applicable sales tax.

On the other hand, the South Carolina Supreme Court has interpreted the imposition of the state’s sales tax to include the full amount the end-consumer pays to an OTC. In addition, last June, an Illinois Circuit Court judge issued a similar ruling based on the reasoning that the OTCs were squarely within the scope of Chicago’s hotel accommodations tax because hotels confer the right to rent rooms to OTCs, who in turn rented them to customers. 

Another point of disagreement among the states surrounds whether the additional fees are subject to tax along with the price of the hotel reservation. While the D.C. Superior Court ruled that OTCs owe sales tax on the full amount charged to customers, the Georgia Superior Court of Muscogee County held that OTCs must collect hotel occupancy tax on the marked-up amount charged to customers, excluding separately disclosed service or facilitation fees. In addition, the Florida Supreme Court has agreed to hear an appeal from a lower court that likewise held the state’s tourist development tax doesn’t apply to facilitation fees.

Like Florida, Wyoming’s stance is similarly under appeal before the Wyoming Supreme Court after the Wyoming Board of Equalization ruled that OTCs were liable for sales tax on the full price customers paid for hotels rooms they reserved via OTC websites.

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