Online Travel Companies Get A Good Decision in Missouri

The Missouri Supreme Court recently ruled that a group of online travel companies were not required to collect hotel and tourism taxes on the difference between the discounted amount received for a room by participating hotels and the amount that the travel service received for their services.1 After the initial suit against the travel companies, the Missouri Legislature passed H.B. 1442 which specifically exempted the online travel companies from collecting the tax. Unlike many other jurisdictions that have passed legislation directed towards travel companies, or whose courts have ruled against them in similar instances, Missouri got it right! But is this decision the first in a trend in favor of the industry, or is it an outlier in a word of anti-taxpayer decisions to come?

Online travel companies2 employ a relatively simple business model. In addition to any other travel related services which they might provide, they contract with hotels from around the world and negotiate discounted room rates for travelers who book their rooms through their websites. These companies never actually purchase an inventory of rooms, but instead, they provide a service to the hotel by finding customers to rent the hotel's rooms. The travel company collects the gross payment for the room from the customer and remits payment to the hotel, net of a facilitation and/or service fee for its effort in obtaining the customer for the hotel. The question is whether hotels should compute the tax based on the discounted room rate on the gross amount before the travel company fee.

In recent years, several other state and local tax jurisdictions have targeted other such businesses by interpreting their statutory language in a less favorable manner or by simply targeting these taxpayers and amending their statutes. However, it seems that the critical issue is whether the travel companies are in the business of renting hotel rooms (generally taxable in most states) or whether it is simply providing a service to the hotel (generally nontaxable in most states). The Missouri Court ultimately sided with the travel companies in this case, but only briefly addressed the real tax issue at hand. Since Missouri H.B. 1442 was passed after the original suit by the taxing authorities, the Court focused much of its decision on whether the new statute applied to the previous assessment and whether it violated the state's constitution. However, in addressing the core tax issue, the Court noted that the travel companies were not "engaged in the business of operating a hotel or motel" and that they did "not provide sleeping rooms," so the hotel and tourism taxes were not applicable. The analysis turns on the question of which party really "furnished" the accommodations or leased the rooms - The party that actually owns the hotel? The party that has employees at the check-in desk? The party that cleans the rooms, turns down the bed linens, and puts a mint on the pillow? It is difficult to believe any court could put the travel companies in any of those roles, but many taxing authorities and state courts have done just that. This analysis and result should hold true for other similar travel companies, but in these times of strained fiscal budgets and resources, the appeal of taxing a faceless internet travel company who ultimately passes the tax onto a tourist will likely be too strong of a temptation for state and local jurisdictions to resist.

Missouri got it right and correctly applied the words found in their state statutes to the facts at hand. Hopefully, this case will embolden courts in other states to reach the correct legal answer and not just accept the politically easy answer, but for any tax practitioner with more than a few years of experience, the expectation of this is very low. Furthermore, it seems only a matter of time before service industries beyond travel are targeted in a similar manner and the craze of Amazon.com statutes expands and becomes the hotels.com statute.

1 St. Louis County v. Prestige Travel, Inc., 344 S.W.3d 708 (Mo. 2011).

2 The defendants involved in this case were Prestige Travel; Expedia, Inc.; Hotels.com; Hotwire; Travelnow.com; Lowestfare.com; Priceline.com; Travelweb; Travelocity.com; Site59.com; Travelport.com; Tripnetwork; Orbitz; Onetravel; Internetwork Publishing; Maupin-Tour Holdings; and Interactive Hotel Solutions.

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RELATED LINKS: For additional insights and information about taxation of online booking companies, see:

• Conflict Between Travel Booking Companies and Localities Generates Litigation, an Emerging Issues Analysis

•  1-14 Bender's State Taxation: Principles and Practice §14.03 - Sales and Use Taxation of Services:  Complex Transactions

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