Technology, Travel Companies and Taxation: Should Expedia Be Required to Collect and Remit State Occupancy Taxes on Profits from Facilitating Hotel Room Rentals?

• Jurisdiction: United States,Federal
• Publication year: 2012
• Citation: Vol. 8 No. 1

Washington Journal of Law, Technology and Arts Volume 8, Issue 1

Technology, Travel Companies and Taxation: Should Expedia Be Required TO Collect AND Remit State Occupancy Taxes ON Profits FROM Facilitating Hotel Room Rentals?

Kerra J. Melvin(fn*) © Kerra J. Melvin

Abstract

Online travel companies ("OTCs") like Expedia and Hotels.com facilitate discounted hotel room rates for customers by contracting with hotels at a wholesale rate and then allowing customers to book rooms on their websites at a marked-up rate that is above the wholesale rate but below the market rate. Many states allow cities and counties to assess an occupancy or bed tax upon persons reserving hotel rooms, with the collections typically used to promote state and local tourism. Such statutes generally require the hotel operator to collect and remit the tax. OTCs have traditionally remitted the wholesale rate and the occupancy tax on that rate to the hotels, which in turn remit the tax to the city or state. This practice has recently come under scrutiny, however, with cities and counties arguing that OTCs should collect and remit the tax on the full retail amount paid to OTCs by the consumer. OTC litigation is occurring in state and federal courts across the country, and courts are split on whether the tax can be assessed on OTC profits. This Article will analyze recent decisions, examine the reasons why courts are split, and then briefly discuss potential resolutions for the OTCs and local governments.

Table of Contents

Introduction .................................................................................... 44

I. History of Online Travel Companies and Occupancy Taxes: Agency Model vs. Merchant Model ....................................... 46

A. Occupancy Tax Statutes ..................................................... 46

B. OTC Pricing Models .......................................................... 47

II. Statutory Interpretation: A Comparison of Cases ................... 48

A. Expedia, Inc. v. City of Columbus: OTCs Contractually Obligated to Collect and Remit Occupancy Taxes on Marked-up Rate Even If Not Statutorily Required to Do So ..................................................................................... 49

B. Louisville/Jefferson County Metro Government v. Hotels.com: OTCs Not Subject To Occupancy Tax Under Kentucky Statute .................................................. 51

C. County of Monroe, Florida v. Priceline.com, Inc.: Occupancy Tax Ordinance Broad Enough to Encompass OTCs ............................................................ 53

III. Summation of Court Decisions and OTC Occupancy Tax Outlook ................................................................................... 55

Conclusion ..................................................................................... 57

Practice Pointers ............................................................................. 58

Introduction

Online travel companies ("OTCs") like Expedia and Hotels.com facilitate discounted hotel room rates for customers by contracting with hotels at a wholesale rate and then allowing customers to book rooms on their websites at a marked-up rate that is above the wholesale rate but below the market rate. Many states allow cities and counties to assess an occupancy or bed tax upon persons reserving hotel rooms, with the collections typically used to promote state and local tourism. Such statutes generally require the hotel operator to collect and remit the tax. OTCs have traditionally remitted the wholesale rate and the occupancy tax on that rate to the hotels, which in turn remit the tax to the city or state. This practice has recently come under scrutiny, however, with cities and counties arguing that OTCs should collect and remit the tax on the full retail amount paid to OTCs by the consumer. OTC litigation is occurring in state and federal courts across the country, and courts are split on whether the tax may be assessed on OTC profits.

Determining whether an OTC is required to collect and remit occupancy tax on its profit margin is a question of statutory interpretation. While the various state and local occupancy tax statutes have the unified purpose of raising revenue for tourism promotion, the language used in these statutes is inconsistent. As discussed in the analysis below, OTC liability essentially hinges upon a court's interpretation of slight differences in occupancy tax statutes. While the Sixth Circuit Court of Appeals determined that the Kentucky occupancy tax statute it recently considered did not require the OTCs to collect the tax, other courts analyzing slightly different statutory language have reached the opposite conclusion. These differing interpretations have led the OTCs to seek a federal exemption from collection of any and all state and local occupancy tax on profit margin.

While the OTCs are garnering varied success in litigation, these victories will not insulate the OTCs from eventual liability to collect and remit on the full retail amount, since states and cities can and likely will amend their statutes to include OTCs. If OTCs hope to avoid collecting in the future, they must continue to seek concrete resolutions through state exemptions, a federal exemption, or by arguing that statutes requiring OTCs to collect and remit on the full retail amount are violative of the state or federal constitution. This Article will discuss three recent decisions, each reaching different conclusions on the ultimate issue of whether OTCs are required to collect and remit the occupancy tax on their profit margin.(fn1) The Article will then analyze these disparate results and summarize what each decision means for OTCs and local governments. Finally, the Article will propose potential long-term occupancy tax solutions for both OTCs and local governments.

I. History of Online Travel Companies and Occupancy Taxes: Agency Model vs. Merchant Model

A. Occupancy Tax Statutes

Many states enacted occupancy tax(fn2) statutes "for the purpose of promoting convention and tourist activity."(fn3) These statutes may include a state occupancy tax, or may authorize counties and municipalities to assess local occupancy taxes.(fn4) The taxes are typically assessed on the person renting the hotel room, and are collected and remitted by the hotel to the taxing authority.(fn5)

The occupancy tax statute considered in Louisville/Jefferson County Metro Government v. Hotels.com,(fn6) is fairly representative of the various state statutes. The Kentucky statute authorizes counties to impose occupancy tax on "the rent for every occupancy of a suite, room, or rooms, charged by all persons, companies, corporations, or other like or similar persons, groups or organizations doing business as motor courts, motels, hotels, inns or like or similar accommodations businesses."(fn7) The majority of these statutes were enacted before consumers began booking hotel rooms online and do not specifically address OTCs.

B. OTC Pricing Models

Many occupancy tax opinions focus on the pricing models used by OTCs. Originally most OTCs used the "agency model," which is similar to the model employed by traditional travel agents.(fn8 )Under the agency model, an OTC would act as a broker so that the third party purchaser avoided dealing directly with the hotel owner.(fn9) In return, the OTC would receive a facilitation fee.(fn10) The amount of occupancy tax remitted by the hotel was calculated based on the entire amount paid by the consumer, including the amount retained by the OTC as a facilitation fee.(fn11)

Over time...