Online Travel Agents Win Tax Battle

Online travel companies (OTCs) won big over hotel occupancy tax challenges when a recent decision by a Los Angeles Superior Court judge rejected the City of Anaheim's claims alleging that OTCs, such as Priceline, Expedia, Travelocity and Orbitz, owe hotel occupancy taxes. At stake was $21 million in back taxes the city said OTCs owed.

The win is one of eight court decisions that affirm the OTC’s and the Interactive Travel Services Association's (ITSA) arguments that they are not liable for taxes on compensation received for booking hotel rooms through their websites. The decisions could have an impact on other municipalities that seek to tax travel firms or agents.

“These tax initiatives, if not stopped, would not only be harmful to the online travel business model that played a substantial role in driving travel and tourism to very strong pre-recessionary levels, but to the traveling public and the tax-collecting authorities themselves,” ITSA argued in a statement. “Counterproductive travel and tourism policy in any event, it would be particularly self-defeating in the worst recession in the past eighty years. ITSA will continue its efforts to educate policy makers all over the country to the dangers of these tax initiatives.”

Commenting on the decision by the California court, attorney Darrel Hieber, a Skadden Arps law firm partner who argued the case, said: "The issue at the heart of this case is simple: Because online travel companies do not own, manage or operate hotels, they are not liable for hotel occupancy taxes. We are pleased the Court, after careful consideration, agreed that the plain meaning of this type of occupancy tax statute simply does not cover OTCs.”

Hieber said the court was the eighth around the nation to dismiss these types of claims on the merits, including two federal appellate courts. “We believe it shows a growing consensus that these types of claims lack support in law or fact," he said. "We are heartened by the Court's decision, and hope it will encourage other municipalities to work with OTCs to increase local tourism through cooperation, rather than wasting time and energy on frivolous litigation."

The City of Anaheim began proceedings against the OTCs in October 2007 for failure to collect and/or remit transient occupancy taxes to the City. On May 23, 2008, the City issued estimated assessments against the OTCs covering an eight-year audit period. The OTCs appealed the assessments in June 2008 by demanding a hearing.

On January 28, 2009, the City hearing officer's ruled in favor of the City and determined that the OTCs were liable for tax assessments totaling $21,326,881.30. The Hearing Officer ruled that each OTC was both "the proprietor" and the "managing agent" of every hotel in the City for which it books any room reservation.

The Superior Court ruled otherwise when the case came before it. One excerpt from the decision: “In sum, based on the Hearing Officer's factual findings, and giving the words of the Anaheim ordinance their ordinary meaning in context, the OTCs cannot be found to be hotel 'operators,' hotel 'proprietors,' or 'managing agents' of a hotel. ... The Hearing Officer acted contrary to law in assessing a tax based on the consideration charged by the OTCs, transaction intermediaries who are not operators, proprietors or managing agents of a hotel.” Judge Carolyn B. Kuhl of the Los Angeles Superior Court heard the case.