Online Travel Companies Find Issues With Hotels Extremely Taxing: Georgia's Hotel-model Occupancy Excise Tax and Expedia, Inc. v. City of Columbus - T.j. Evans

• Jurisdiction: Georgia,United States
• Publication year: 2010
• Citation: Vol. 61 No. 4

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Online Travel Companies Find Issues with Hotels Extremely Taxing: Georgia's Hotel-Motel Occupancy Excise Tax and Expedia, Inc. v. City of Columbus

In Expedia, Inc. v. City of Columbus,¹ the Georgia Supreme Court held that under a plain reading of the "Hotel-Motel Occupancy Excise Tax" ordinance of Columbus, Georgia,² and the Official Code of Georgia Annotated (O.C.G.A.) enabling statute,³ the applicable tax rate must be applied to the amount an online travel company (OTC) charges a purchaser for the right to occupy a hotel room, rather than the discounted amount for which the OTC contracts with hotels to pay for a room.⁴ The supreme court's decision "marks the first time any state's highest court has ruled on the substantive issues at the center of dozens oflegal and administrative battles between the OTCs and municipalities around the country."⁵

I. Factual Background

Expedia, Inc., an OTC, reserves hotel rooms and allows customers accessing its services over the Internet the opportunity to make reservations with hotels. Expedia contracts with hotels at a "discount" or "wholesale rate" for a specific number of rooms. The company then advertises and offers the hotel rooms for an amount greater than the wholesale rate, known as the "room rate," to the public on its website. When a customer purchases a hotel room through Expedia, the amount of money designated for "taxes and service fees" is disclosed to the customer; however, the specific portion for taxes and the portion for service fees are not disclosed. When Expedia contracts with hotels, the contract provides that Expedia "shall collect all applicable taxes from its customers."⁶

After the initial transaction, the customer is not charged anything and only provides a credit card for incidental charges upon checking into the hotel. The hotel is contractually obligated to send Expedia an invoice for the contracted wholesale rate, in addition to the occupancy taxes based on the wholesale rate. Expedia then pays the hotel for the amount on the invoice and the hotel forwards the taxes to the municipal tax authority. As a result, Expedia earns an amount in excess of the wholesale rate and taxes. This process is part of Expedia's business model, known as the "merchant model." During the process, Expedia never discloses the customer's cost of the room rate to the hotel.⁷

Georgia authorizes its municipalities to impose taxes related to hotel visits and to subsequently use the collected taxes to encourage tourism.⁸ The enabling statute authorizes municipalities to levy an excise tax "at the applicable rate on the lodging charges actually collected."⁹ In accordance with this authority, the City of Columbus, Georgia, enacted the Hotel-Motel Occupancy Excise Tax Ordinance,¹⁰ which levies:

an excise tax in the amount of seven percent of the charge to the public upon the furnishing for value of any room or rooms or lodging or accommodations furnished by any person licensed by or required to pay

business or occupation taxes to Columbus for operating a hotel within the meaning of this article.¹¹

On May 30, 2006, the city filed a complaint against Expedia, seeking a declaratory judgment, injunctive relief, and other equitable remedies. The complaint alleged that under Expedia's merchant model, Expedia should pay hotel occupancy or excise taxes based on the room rate charged to the public, rather than the contracted wholesale rate agreed to by Expedia and different hotels. The trial court found, in part, that (1) Expedia contracts with hotels to collect the consumer's hotel tax payment for the hotel; (2) as a matter of law, the statute and ordinance apply a tax on the room rate charged to the customers by Expedia, rather than Expedia and the hotel's contracted wholesale rate; and (3) any facilitation or service fees that Expedia separately discloses to the customers are not taxable. The trial court issued a permanent injunction against Expedia, requiring the company to collect and remit taxes in the future. However, the trial court did not determine whether Expedia was a hotel operator for purposes of the statute and ordi-nance.¹²

Expedia appealed the trial court's decision to the Georgia Court of Appeals, seeking review of various alleged errors made by the lower court. The appeal was subsequently transferred to the Georgia Supreme Court because the court of appeals determined that the trial court had based its ruling on a constitutional issue.¹³ The supreme court considered whether the trial court erred (1) "when it found as a matter of law that Expedia is required to collect hotel occupancy taxes"¹⁴ and (2) "when it construed the statutory terms 'lodging charges actually collected' (O.C.G.A. Sec. 48-13-51(a)(1)(B)(i)) and 'charge to the public' (Columbus Code Sec. 19-111) as akin to the room rate that Expedia charges to its customers, rather than the wholesale rate it negotiates with hotels."¹⁵

II. Legal Background

A. Before E-Commerce: The Substantial Nexus

Before the era of OTCs and Internet retailers, the United States Supreme Court recognized a potential use tax issue in National Bellas

Hess, Inc. v. Department ofRevenue.¹⁶ There, the Illinois Department of Revenue brought an action to collect taxes and penalties against National Bellas Hess, Inc., in accordance with an Illinois tax statute. Hess did business in Illinois by mailing catalogues biannually to Illinois residents; there were no retail outlets, sales representatives, telephone numbers, or advertisements in Illinois.¹⁷ Hess argued it was not present in Illinois for tax purposes, and the Court set a standard for physical presence (sometimes called the "substantial nexus requirement") that required out-of-state companies to collect the use tax from customers only if the company had a physical presence within state lines.¹⁸ Thus, a state could require the company to collect taxes from its customers only if the company had a physical presence within state lines.¹⁹ The Supreme Court reasoned that the complexity of different state and local taxes would substantially increase the burden on interstate commerce if there was no physical presence within the state.²⁰ The Court did not want out-of-state companies like Hess to bear the burden of compliance with every other state and local tax jurisdiction where it had customers.²¹ Also, the Court determined that a mail-order company—a company only doing business by mail—did not meet the substantial nexus requirement because Hess's benefit from the sales and facilities within the State of Illinois was not sufficient to require Hess to pay additional taxes.²²

Twenty-five years later, the Supreme Court reevaluated the Hess decision in Quill Corp. v. North Dakota,²³ a case with facts substantially similar to those of Hess. Quill Corporation was an out-of-state mailorder company; there were no Quill retail outlets or sales representatives in North Dakota.²⁴ Still, North Dakota imposed a use tax upon property purchased for storage and use within the State, which evolved into companies engaging in regular or systematic solicitation of consumers being subject to the tax.²⁵ However, as commerce and technology evolved, the burden on out-of-state companies to comply with local taxing authorities was no longer as difficult to bear.²⁶

Nevertheless, the Supreme Court reaffirmed its "bright-line test" and "substantial nexus requirement" from the Hess decision, holding that there must be a physical presence by a company in a state for that state to require the collection and remission of taxes from consumers.²⁷ The Court recognized that "a vendor whose only contacts with the taxing State are by mail or common carrier lacks the 'substantial nexus' required by the Commerce Clause."²⁸ As a result, the Court held that North Dakota could not require Quill to collect the use tax from customers.²⁹ The Court once again recognized the significant burden that companies would bear if required to deal with every state and county tax jurisdiction.³⁰ However, the Court gave several invitations for Congress to intervene, reasoning that the use tax could best be handled by Congress.³¹ The decision in Quill made it evident that as commerce and technology evolved and the number of taxable jurisdictions grew, requirements on out-of-state companies would become less formalistic because the Court wanted to stray away from "bright line tests."³² The Court noted that the bright line rule in Hess, which specifically pertains to use taxes, "encourages settled expectations and . . . fosters investment by businesses and individuals."³³

B. Georgia's Tax Scheme

The Georgia Constitution grants municipalities the authority to tax property so long as such taxes are lawfully received for public purpos-es.³⁴ Pursuant to this authority, the Georgia General Assembly enacted O.C.G.A. Sec. 48-13-50 to -63,³⁵ allowing each county and municipality to raise revenue to promote and attract tourism.³⁶ The enabling statute also authorizes municipalities to levy and collect an excise tax on entities furnishing hotel rooms, lodgings, and other accommodations.³⁷ An "innkeeper" is "any person who is subject to taxation under [O.C.G.A. Sec. 48-13-50.2(2)] for the furnishing for value to the public any rooms, lodgings, or accommodations."³⁸ While many jurisdictions levy hotel taxes under similar statutes, some have not determined whether OTCs are innkeepers under these laws. Still, courts in some of these jurisdictions have found that OTCs are subject to hotel taxes,³⁹ with some courts reasoning that OTCs do in fact "furnish" rooms.⁴⁰

Georgia hotel occupancy taxes apply to "any person or legal entity licensed by or required to pay a business or occupation tax to the governing authority imposing the tax for operating a hotel."⁴¹ Further, the tax is imposed on hotel guests, who must pay the tax "to the persons or entity providing the room, lodging, or accommodation."⁴² The

"person or legal entity" collecting the taxes...