Federal District Court Holds OTCs Not Liable For Georgia Hotel Taxes For Prior Transactions

The U.S. District Court of the Northern District of Georgia has ruled that online travel companies (OTCs) that facilitate hotel reservations were not liable for taxes on the amounts paid by consumers to book the rooms for transactions taking place on or before May 16, 2011.1 However, had the municipalities seeking the tax presented evidence to compute the damages, the Court may have granted them with respect to the OTCs' failure to collect proper tax amounts on "breakage transactions" that occurred on or prior to May 16, 2011.2

Background

Municipalities in Georgia filed a suit against a group of OTCs for failure to identify taxes charged and paid by hotel guests and for failure to remit the taxes. The municipalities subsequently filed a motion for summary judgment based on the Georgia Supreme Court's decision, City of Atlanta v. Hotels.com,3 which held that the OTCs were not liable for back taxes. In a partial settlement agreement, the parties agreed to pay the difference between the hotel occupancy tax calculated on the wholesale rate versus the tax calculated on the retail rate for all hotel occupancies occurring after May 16, 2011.

Online Travel Companies

OTCs book hotel rooms and make other travel arrangements for customers over the Internet under what has been labeled the "merchant model" of business. OTCs first enter into contracts with individual hotels and negotiate a discounted rate for each hotel room, commonly termed the wholesale rate. OTCs then offer reservations of the rooms to the public at a rate that includes the amount paid to the hotel operator plus taxes and service fees. When a customer books and pays the total amount to an OTC, the OTC pays the wholesale rate and hotel occupancy taxes to the hotel. After customers complete their stay at a hotel, the hotel remits the taxes to the appropriate taxing authorities.

Hotel Occupancy Tax

Georgia's excise tax on rooms, lodging, and accommodations (the Enabling Statute) authorizes a municipality to impose and collect an excise tax on accommodations furnished by a person or legal entity licensed by, or required to pay business or occupation taxes to, the municipality for "operating a hotel ... or accommodations," which "are regularly furnished for value."4

Under the Enabling Statute, the hotel occupancy tax is imposed on "any person or legal entity licensed by or required to pay a business or occupation tax to the governing authority imposing the tax for operating a hotel ... or accommodations ... and shall apply to the furnishing for value of any room, lodging, or accommodation."5

With respect to the tax base, the tax applies to "the lodging charges actually collected, or if the amount of taxes collected from the hotel or motel guest is in excess of the total amount that should have been collected, the total amount actually collected must be remitted."6 The Enabling Statute provides that the person or entity collecting the tax is required to remit the tax to the governing authority.7

The Georgia Supreme Court, in City of Atlanta and City of Columbus,8 determined that the Enabling Statute required OTCs to remit hotel occupancy taxes based on the retail rate on a prospective basis "so long as" they continued to voluntarily collect and remit the taxes, but that the OTCs were not required to pay back taxes. According to the Georgia Supreme Court, if the OTCs ceased to collect the tax, then the issue would be "moot." The Georgia Supreme Court also found that the enforcement provisions of the Enabling Statute only applied to "innkeepers" or "hotel operators" and that the...