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TAX MATTERS

Online travel companies not liable for occupancy taxes

 

By Karen M. Cooley, CPA, MBA and Darlene Pulliam, CPA, Ph.D.
December 2012

The Sixth Circuit affirmed a district court’s judgment in favor of defendant online travel companies (OTCs) for alleged violations of local tax laws. The district court had held that the OTCs were not liable for collecting occupancy taxes.

It is common practice for OTCs such as Priceline.com, Expedia, and Travelocity (which were among the lawsuit’s defendants) to provide discounted hotel room rates to customers by contracting with hotels for rooms at “wholesale” rates and then booking rooms for customers on their websites at a marked-up “retail” rate that is above the wholesale rate but below the market rate. Most states allow cities and counties to assess an occupancy tax upon the persons reserving those hotel rooms. The hotel operator is required to collect and remit the tax. Eleven localities in Ohio (including cities, townships, and a county) sued the OTCs, arguing that the companies were required to remit a guest occupancy tax on the higher retail rate the companies charged customers. OTCs have traditionally remitted tax based on the contractual wholesale room rate that the hotels charged the companies. In essence, the point at issue was whether OTCs must collect and remit occupancy tax on their profit margin.

The district court held that the OTCs had no obligation to collect the guest taxes because they were not among the three types of entities designated by the localities’ tax ordinances as responsible for doing so: operators (proprietors of the hotel, whether in the capacity of owner, lessee, licensee, or any other capacity, and managing agents of hotels); vendors (persons who own or operate a hotel and who furnish lodging); or hotels (establishments kept, used, maintained, advertised, or held out to the public to be a place where sleeping accommodations are offered to guests). The court found that the tax ordinances were specifically concerned with the amount paid to the hotel for lodging and did not apply to the amount paid for service or booking fees, nor for the cost of using the online services. The Sixth Circuit affirmed the district court’s judgment.

On a related issue, the district court held that the OTCs were required to remit any amounts that they did collect as a tax. Thus, a portion of the amounts collected from customers under the description “taxes and service fees” should be remitted. However, the court determined (and the Sixth Circuit affirmed) that there was not sufficient evidence to suggest that OTCs collected money for taxes that they had not remitted as a tax.

While the courts held for the OTCs in this situation, OTC litigation continues in courts nationwide with mixed results. This is due to slight differences in statutory language and interpretation, creating different judicial conclusions (see, e.g., District of Columbia v. Expedia Inc., No. 2011 CA 2117 (D.C. Super. Ct. 9/24/12), holding some of the same OTCs liable for sales taxes because the D.C. statute does not require a hotel room seller to be the party furnishing the room). States and cities more than likely will amend their statutes to include OTCs. As a result, OTCs are seeking a federal exemption from collection of state and local occupancy tax on profit margin.

  City of Columbus, Ohio v. Hotels.com, L.P., No. 10-4531/4545 (6th Cir. 9/10/12), aff’g No. 3:05-CV-7443 (N.D. Ohio 11/18/10)

By Karen M. Cooley, CPA, MBA, instructor of accounting, and Darlene Pulliam, CPA, Ph.D., Regents Professor and McCray Professor of Business, both of the College of Business, West Texas A&M University, Canyon, Texas.

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