A California Superior Court in Los Angeles today set aside a hearing officer’s decision in Anaheim, Calif., in 2009 that would have forced Priceline, Expedia, Orbitz and friends to shell out $21.3 million in hotel taxes tied to their practice of the merchant model.
In a stunning reversal of a year-earlier decision, Judge Carolyn Kuhl of Los Angeles Superior Court, which was handling the Anaheim case, ruled today: “OTCs [online travel companies] do not control hotels.”
On Jan. 28, 2009, a hearing officer in Anaheim, Calif., found that Priceline, Expedia Inc., CheapTickets, Orbitz, Travelocity, Site59, hotels.com and Hotwire acted as hotel “proprietors” and “managing agents of hotels” when selling rooms via the merchant model and thus owed the city taxes on the difference between the net rate they get from the hotels and the retail rate they charge consumers.
But, the court in Los Angeles shot down that argument, saying the local ordinance does not require taxes on the retail rate from “mere agents of the operator.”
In sum, based on the Hearing Officer’s factual findings, and giving the words of the Anaheim ordinance their ordinary meaning in context, the OTCs cannot be found to be hotel ‘operators,’ hotel ‘proprietors,’ or ‘managing agents’ of a hotel,” the court ruled … “The Hearing Officer acted contrary to law in assessing a tax based on the consideration charged by the OTCs, transaction intermediaries who are not operators, proprietors or managing agents of a hotel.”
Darrel Hieber, a Skadden Arps partner who argued the case for the OTCs, commented:
“The issue at the heart of this case is simple: Because online travel companies do not own, manage or operate hotels, they are not liable for hotel occupancy taxes. We are pleased the Court, after careful consideration, agreed that the plain meaning of this type of occupancy tax statute simply does not cover OTCs. This Court becomes the eighth around the nation to dismiss these types of claims on the merits, including two federal appellate courts. We believe it shows a growing consensus that these types of claims lack support in law or fact. We are heartened by the Court’s decision, and hope it will encourage other municipalities to work with OTCs to increase local tourism through cooperation, rather than wasting time and energy on friviolous litigation.”
Today’s ruling is a huge victory for the OTCs, although they face dozens of ongoing lawsuits and audits across the country, and are seeking federal legislation to define their hotel tax obligations — or lack thereof — so they can stop the floodgates of litigation.
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Ya gotta love these hotel tax cases…
Of course, the OTCs are not hotel operators. They do not have any form of management contract with the hotel owner, nor do they provide staff or control any operational expense line item at a hotel property.
OTCs do however, serve as the merchant of record for consumer hotel transactions. In most cases, the OTCs now state that they do not assess fees on standalone hotel bookings. The hotels also require that the OTCs match the Best Available Rate quoted on the hotel website.
It all comes down to how the local tax law is written. If a city defines the hotel tax basis is the retail amount charged to the consumer, the OTC’s may wind up with a tax liability on their markup over the net wholesale rate paid to the hotel.
If the basis is the amount paid to the hotel operator, the OTCs seem obliged only to collect taxes on the hotel’s net rate, enabling the OTC to bank the tax differential between the net and retail rates as margin when matching tax inclusive BAR pricing established by the hotel operator.
With each municipality having slightly different wording of hotel occupancy tax laws and many fearing retribution by the OTCs if they elect to update their tax laws, this issue is far from over.
It appears that the only group that benefits from this messy litigation are the lawyers for the OTCs that continue to get paid win or lose all the way through the appeals process. Given that each OTC normally has its own team of lawyers and there are a myriad of municipalities and/or counties and/or states involved, there is a huge amount of overlap and inefficiency.
While the final outcome is still hard to predict, two things are for certain: There will be many ongoing appeals from both sides, and this is going to get expensive. It would be interesting to tally up the aggregate legal spend on both sides of the courtroom.
Robert: I agree it all depends on how local laws — thousands of them — are written. It will be interesting to see if the OTCs succeed in getting Congress to take up federal legislation.
Eventually, I wouldn’t be surprised to see the hotel tax issue wind up before the U.S. Supreme Court.