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Online Travel Companies And Hotel Occupancy Tax Litigation

Over the past several years, a spate of litigation has arisen throughout the country concerning the application of hotel occupancy taxes to online bookings. The cases focus 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.


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 re-sellers 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.


Even if the travel companies are found substantively liable under the local ordinances 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.

In the context of sales tax, the Court has held that substantial nexus means a state can exert sales tax jurisdiction over a remote seller only if the seller has a physical presence in the state. Quill Corp. v. North Dakota, 504 U.S. 298 (1992).


Assuming that the travel companies are found to have collection and remittance obligations, 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.


. . . [T]he Multistate Tax Commission . . . draft model statute . . . essentially creates a two-step process. It requires the companies to pay occupancy tax on the discounted rate they pay to the hotel, and then to collect and remit a sales tax on what the statute terms the "facilitation fee," the service fee charged to the customer for facilitating an online booking. A number of issues have been raised in response to this approach, including the obstacle of nexus as well as compliance problems for the online travel companies. Although the companies had submitted their own proposal to the MTC's drafting group, the drafters chose to pursue a different approach. There is still considerable controversy surrounding the approach taken in the draft model statute, which the companies contend is unduly burdensome.


The Interactive Travel Services Agency (ITSA)... claims that the increased gain to the cities as a result of greater occupancy tax collected would be offset by a loss of tourism to cities that impose occupancy tax obligations. Specific information regarding the ITSA's arguments may be found on the ITSA's website:

In addition to potentially higher rates, cities that prevail in their occupancy tax lawsuits often find that online travel companies stop contracting with hotels in their cities, thus limiting the customer's choices in that city and perhaps lost revenue from fewer bookings in general.

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