Posted tagged ‘Expedia’

Alabama Supreme Court Rules in Favor of Orbitz and Other Online Travel Companies; Online Travel Companies Not Subject to Lodgings Tax

April 23, 2012

 by Jennifer Weidler

The Alabama Supreme Court recently addressed the issue of whether online travel companies are liable for the payment of municipalities’ lodgings tax.SeeCity of Birmingham, et al. v. Orbitz, LLC, et al., Dkt. No. 1100874 (Ala. S. Ct. 2012).The appellants in the case were nine (9) Alabama municipalities and the appellees were sixteen (16) online travel service companies and related entities.

In their complaint, the municipalities alleged that municipal ordinances were enacted which imposed a lodgings tax on hotels located within their city limits; that the municipal lodgings tax is in addition to a State lodgings tax; and that the tax is calculated as a percentage of the amount charged by such hotels for the use of a room.

The online travel companies’ business model involves a customer making a room reservation through the online service, the customer is charged an amount for (1) the occupancy of the hotel room, (2) a lodgings tax recovery charge, and (3) an additional amount retained as compensation for the services.  Thereafter, the online travel company is billed by the hotel based upon a contract between the on line travel company and the hotel for the right to offer reservation services to guests who would like to make a reservation at the hotel.  The hotel bills the online travel company for the price of the room and the state and local tax thereon.  The hotel then pays the lodgings taxes to the State and the appropriate municipality.

The municipalities alleged that the lodgings tax should be imposed not only upon the hotels for the amount they charge as rent for the occupancy of their hotel rooms, but additionally upon the amount that online travel companies charge the customer for their online services.

The Alabama Supreme Court disagreed with the municipalities and found forthe online travel companies.  In so doing, it reasoned that the statute and ordinances were not ambiguous, and clearly imposed the lodgings tax upon every person, “engaging in the business of renting or furnishing any rooms, in any hotel.”  The tax is fixed as a percentage of “the charge for such room…including the charge of use or rent of personal property and services furnished in such room.”  Additionally, the court found that the DOR specifically promulgated a rule affirming that only persons who operate a hotel are persons who rent or furnish rooms.  As such, the court found that the online travel companies do not operate a hotel in any of the municipalities and cannot be said to have engaged in the business of renting or furnishing rooms for purposes of the lodging tax.

Numerous cases have been brought in various states and jurisdictions throughout the country touching on the same or similar issues with varying results.  For review of a similar holding by a different court, see our detailed posting regarding the Pennsylvania Commonwealth Court’s holding relating to Expedia and the Philadelphia Hotel Tax.

Pennsylvania Commonwealth Court Holds Expedia Not Subject to Philadelphia Hotel Tax

February 6, 2012

  by Stewart Weintraub and Jennifer Weidler

On February 2, 2012, the Pennsylvania Commonwealth Court (“Commonwealth Court”) affirmed the decisions of the Philadelphia County Common Pleas Court and the City of Philadelphia Tax Review Board (“TRB”),finding Expedia, Inc. (“Expedia”)was not an operator of a hotel and was not subject to the City of Philadelphia’s (“City”) Hotel Room Rental Tax (“Hotel Tax”).

Expedia is an online travel company that allows travelers to make reservations for hotel rooms, flights, rental cars, events and other travel arrangements through its website.  With respect to hotels, Expedia operates through contracts with various hotels in many cities throughout the United States and abroad, including the City.  The contracts between Expedia and the hotels allow Expedia to book room reservations for travelers at the hotels.  The contracted room rate billed to Expedia by the hotels is a discounted net rate.  The room rate quoted by Expedia to the traveler includes the discounted room rate, a facilitation fee, service fees and a tax recovery charge representing an estimate of the City’s Hotel Tax (and other hotel taxes,if applicable) based upon the net rate charged for the room by the hotel.  The hotel calculates the City’s Hotel Tax based solely upon the net room rate, not inclusive of any extra fees.

During 2007, the City attempted to assert the Hotel Tax upon Expedia for the actual rate that it charges to the traveler, inclusive of its fees.  The assessment brought by the City alleged an amount due of $1,053,447.40 for unpaid Hotel Tax for the period from 2001 through 2005, inclusive of interest and penalties.  Expedia appealed the assessment to the TRB, alleging that: (1) it was not subject to the Hotel Tax because it was not a hotel operator; (2) that the fees it charged and retained were not subject to the Hotel Tax; and (3) that the imposition of the Hotel Tax was prohibited by the Commerce Clause of the United States Constitution.[1]

The TRB held in favor of Expedia, reasoning that Expedia was not a hotel “operator” as defined by the Philadelphia Code, that it could not, independent of hotel management, reserve and rent hotel rooms and that its only activities were to provide information about hotel availability, amenities, and rates to potential travelers and collect payment from the travelers.  Thereafter, the City appealed to the Common Pleas Court, which denied the City’s appeal and affirmed the TRB’s decision.  Subsequently, the City appealed to the Commonwealth Court.

The Commonwealth Court affirmed the TRB decision, finding in favor of Expedia.  On appeal,the City first argued that the TRB committed legal error in concluding that only a hotel can be an “operator” under the Philadelphia Code.  The Commonwealth Court examined the Philadelphia Code’s definition of “operator” as it relates to the Hotel Tax.  The Philadelphia Code defines “operator” as:

Any individual, partnership, non-profit or profit-making association or corporation or other person or group of persons who maintain, operate, manage, own, have custody of, or otherwise possess the right to rent or lease overnight accommodations in any hotel to the public for consideration. § 19-2401(7).

 The Commonwealth Court reasoned that the above definition clearly infers ownership or control of the premises and in the case at hand, the hotel, not Expedia, controls access to the hotel rooms, the right to rent those rooms and any accompanying amenities.

The City next argued that the TRB erred by misinterpreting the Philadelphia Code to hold that a taxable rental “transaction” only occurs at the traveler’s point of arrival at the hotel.  Section 19-2401(14) of the Philadelphia Code defines “transaction” as the “activity involving the obtaining by a transient or patron of the use or occupancy of a hotel room.”  Section 19-2401(6) defines “occupancy” to include “use or possession or the right to the use or possession…of any room in a hotel.”  The City’s argument necessarily failed because Expedia does not provide its customers with the use or possession of a room or the right to the use or possession of a room.  Moreover, the hotel ultimately receives the consideration for the room rental, not Expedia, since Expedia remits to the hotel the quoted room rate along with the applicable Hotel Tax.  Thus, the Commonwealth Court found that Expedia could not be subject to the Hotel Tax based upon the full amount of its fees charged to travelers and, therefore, affirmed the TRB decision.

Notably, there was a single dissentingopinion.  The dissent stated it would have held that the Hotel Tax should be imposed upon the consideration Expedia received from the travelers, not the amount that it pays its hotels. The dissent believed that Expedia fit within the definition of an “operator,” since he interpreted the contractual language between Expedia and the hotels to mean that Expedia has the right to a number of rooms to rent to its customers.The same or similar issues have been presented by numerous state or local taxing authorities throughout the United States.  While a few courts, for various and different reasons, sustained the taxing jurisdictions claims, the vast majority of jurisdictions ruled that Expedia is not subject to state and local hotel room rental taxes.


[1] Stewart M. Weintraub, Esquire, represented Expedia at the Tax Review Board and subsequently assisted with the appeals to the Philadelphia County Common Pleas Court as well as to the Pennsylvania Commonwealth Court.