Travel Booking Companies and Hotel Occupancy Tax Liability

City of Los Angeles v. Hotels.com, L.P., et al., No. BC 326693 (Cal. Super. Ct. Dec. 30, 2004), and other similar cases recently filed in a number of state and federal courts nationwide, focuses on whether online hotel reservation and travel companies are required to collect and remit transient occupancy tax (“occupancy tax”) on the amount they charge a customer when reserving a hotel room.  This commentary provides a discussion of several of the issues presented in the Los Angeles v. Hotels.com case.  It also addresses the current status of the case, explains the efforts of the Multistate Tax Commission to craft a compromise approach between the corporate taxpayers and the taxing jurisdictions, and highlights the potential consequences of a decision in this case for the cities, counties, and travel industry players involved in the lawsuit.

Chuck Moll writes: State and local governments impose a variety of taxes on overnight accommodations. The types of taxes and how they are calculated varies widely from state to state. See LexisNexis Comparative Survey of State Legislation/Regulation on Travel and Tourism (Oct. 2007), available via Cal. Rev. & Tax. Code § 7280. While some states levy statewide taxes on hotel accommodations, other states permit local governments to do so.

...

Many of the occupancy tax ordinances at issue in the pending occupancy tax cases were enacted before the introduction of the internet or, at least, before online travel reservations became popular. The ordinances focus on the obligations of owners, operators, and managers of hotels, or on sellers and resellers of hotel rooms. The online travel companies assert that they do not fall into any of these categories, but instead are intermediaries providing a service between hotel owners or operators and customers. The online travel companies also refute claims that they should be held liable for the tax as agents for the hotel operators or owners.

...

The defendant companies argue that the ordinance limits the levy of tax to a percentage of the “rent charged by the operator” of a hotel (emphasis added).  First, with respect to the term “rent,” the online travel companies assert that they are not charging rent according to the limited definition in the ordinance. “Rent” is defined under both the original and previous ordinance as “the consideration charged . . . for the occupancy of a space in a hotel.” Section 21.7.2(e). The travel companies insist that they are not charging rent for space in hotels, nor are they serving as sellers or resellers of rooms.

...

The defendant companies argue that the ordinance limits the levy of tax to a percentage of the “rent charged by the operator” of a hotel (emphasis added).  First, with respect to the term “rent,” the online travel companies assert that they are not charging rent according to the limited definition in the ordinance. “Rent” is defined under both the original and previous ordinance as “the consideration charged . . . for the occupancy of a space in a hotel.” Section 21.7.2(e). The travel companies insist that they are not charging rent for space in hotels, nor are they serving as sellers or resellers of rooms.

...

Even if the travel companies are found substantively liable under the Los Angeles ordinance for the collection and remittance of occupancy tax, there still must be constitutional authority to impose the tax. Pursuant to U.S. Const., Art. I, § 8, cl. 3, the Commerce Clause empowers Congress “to regulate Commerce . . . among the several states.”   Courts have inferred from this grant of power a restriction on state regulation, termed the “Dormant Commerce Clause,” and have prohibited states from improperly burdening, or discriminating against, interstate commerce. Several factors must be considered in determining whether a state’s imposition of tax will pass Commerce Clause scrutiny. See Complete Auto Transit v. Brady, 430 U.S. 274 (1977). The first of these factors, and the one most relevant here, is the requirement that the activity being taxed have  “substantial nexus” with the taxing state.

...

Assuming that the travel companies are found to have collection and remittance obligations under the Los Angeles occupancy tax ordinance, and assuming that the obstacle of nexus can be overcome, the issue that remains is how to determine what amount is subject to occupancy tax when a hotel room is booked online via a discount travel broker. To understand what is at stake in this determination, we can utilize the example presented in the plaintiff’s original complaint.  See Class Action Complaint, No. BC326693 (Cal. Super. Ct. Dec. 30, 2004).

...

The Los Angeles v. Hotels.com case is one of many occupancy tax cases being addressed in administrative venues and courtrooms nationwide. Given the amount of money involved, and the potential consequences to all interested parties, these cases are likely to continue receiving significant attention as they progress through the administrative and judicial review processes.  As court decisions will inevitably involve subsequent appeals, resolution of this matter will require at least several more years of litigation.