Online Travel Companies Avoid Local Taxes

For the first time, a federal appellate court has held that online travel companies cannot be compelled to collect and pay local “bed” taxes on the rooms they sell to consumers.

Similar disputes nationwide have been percolating through federal and state courts challenging the application of occupancy tax laws, written before online travel booking took off. The various suits sought payments from online firms.

The Fourth U.S. Circuit Court of Appeals concluded that an online travel company does not meet the statutory definition of “retailer” under a Pitt County, NC, occupancy tax law. Pitt County v. Hotels.com, No. 07-1900 (4th Cir. 2009).

In September, a Kentucky federal judge held that online travel service Hotels.com L.P. did not have to collect local occupancy taxes. Louisville/Jefferson County Metro Gov't. v. Hotels.com, 2008 WL 4500050 (W.D. Ky.). That ruling was recently appealed.

In San Antonio, a federal judge granted class status to several cities in Texas challenging Hotels.com and other firms for failure to collect bed taxes. That suit is pending. City of San Antonio v. Hotels.com, 2008 WL 2486043 (W.D. Texas).

Case of First Impression

“The Fourth Circuit rejecting the Pitt County claim is the first appellate decision by any circuit court nationwide on the occupancy tax question,” says Darrel J. Hieber, a partner in Skadden Arps, Slate Meagher & Flom's Los Angeles office. He represented Priceline.com Inc., one of more than a dozen online travel firms named in the suit.

“We're pleased the Court of Appeals recognized [that] the ordinance simply does not reach online travel companies,” he says. “The court recognized two important things: The court can't expand the tax statute to reach beyond its plain language, and even ambiguities in the law must be resolved against taxing authorities.”

“We think the decision is absolutely wrong,” says John Murray of Murray & Murray in Sandusky, OH, the attorney for Pitt County. “The court said the online companies are re-letting rooms. They are not. They are selling directly.”

Pitt County maintained that Hotels.com and other firms bought bulk rooms at wholesale rates, $70 per night for example, and rented them to consumers for $100 per night, according to the court.

The online firm would pay an occupancy tax based on its own wholesale purchase, but did not pay the greater amount to reflect the $100 rate it charged. The difference between the taxes paid on the wholesale versus retail rate per room results in a loss of 90 cents per room, per night, based on Pitt County's 3% occupancy tax, according to the court.

Hieber points out that any efforts to amend the state or local laws would have to abide by federal restrictions on Internet taxing, which bar discriminatory taxing of Internet businesses: “Localities can't impose a tax unless there is a nexus to the Internet company in that locality.”

In state cases, courts have generally dismissed suits with instructions that county or state taxing agencies exhaust their administrative remedies. A North Carolina court issued an unpublished decision ordering counties to go back to administrative agencies to pursue their claims in a suit last year. Wake County v. Hotels.com, 2007 WL 4125456 (Wake Co., N.C., Super. Ct.).

Other cities and counties under similar orders include Los Angeles; San Diego; Rome, GA; and Nassau County, NY.

For the first time, a federal appellate court has held that online travel companies cannot be compelled to collect and pay local “bed” taxes on the rooms they sell to consumers.

Similar disputes nationwide have been percolating through federal and state courts challenging the application of occupancy tax laws, written before online travel booking took off. The various suits sought payments from online firms.

The Fourth U.S. Circuit Court of Appeals concluded that an online travel company does not meet the statutory definition of “retailer” under a Pitt County, NC, occupancy tax law. Pitt County v. Hotels.com, No. 07-1900 (4th Cir. 2009).

In September, a Kentucky federal judge held that online travel service Hotels.com L.P. did not have to collect local occupancy taxes. Louisville/Jefferson County Metro Gov't. v. Hotels.com, 2008 WL 4500050 (W.D. Ky.). That ruling was recently appealed.

In San Antonio, a federal judge granted class status to several cities in Texas challenging Hotels.com and other firms for failure to collect bed taxes. That suit is pending. City of San Antonio v. Hotels.com, 2008 WL 2486043 (W.D. Texas).

Case of First Impression

“The Fourth Circuit rejecting the Pitt County claim is the first appellate decision by any circuit court nationwide on the occupancy tax question,” says Darrel J. Hieber, a partner in Skadden Arps, Slate Meagher & Flom's Los Angeles office. He represented Priceline.com Inc., one of more than a dozen online travel firms named in the suit.

“We're pleased the Court of Appeals recognized [that] the ordinance simply does not reach online travel companies,” he says. “The court recognized two important things: The court can't expand the tax statute to reach beyond its plain language, and even ambiguities in the law must be resolved against taxing authorities.”

“We think the decision is absolutely wrong,” says John Murray of Murray & Murray in Sandusky, OH, the attorney for Pitt County. “The court said the online companies are re-letting rooms. They are not. They are selling directly.”

Pitt County maintained that Hotels.com and other firms bought bulk rooms at wholesale rates, $70 per night for example, and rented them to consumers for $100 per night, according to the court.

The online firm would pay an occupancy tax based on its own wholesale purchase, but did not pay the greater amount to reflect the $100 rate it charged. The difference between the taxes paid on the wholesale versus retail rate per room results in a loss of 90 cents per room, per night, based on Pitt County's 3% occupancy tax, according to the court.

Hieber points out that any efforts to amend the state or local laws would have to abide by federal restrictions on Internet taxing, which bar discriminatory taxing of Internet businesses: “Localities can't impose a tax unless there is a nexus to the Internet company in that locality.”

In state cases, courts have generally dismissed suits with instructions that county or state taxing agencies exhaust their administrative remedies. A North Carolina court issued an unpublished decision ordering counties to go back to administrative agencies to pursue their claims in a suit last year. Wake County v. Hotels.com, 2007 WL 4125456 (Wake Co., N.C., Super. Ct.).

Other cities and counties under similar orders include Los Angeles; San Diego; Rome, GA; and Nassau County, NY.