State & Local Tax Alert - March 2012

Breaking state and local tax developments from Grant Thornton LLP

Tennessee and Pennsylvania Courts Hold Hotel Taxes Do Not Apply to Retail Rate Charged by OTCs

A federal District Court in Tennessee and the Commonwealth Court of Pennsylvania have held that online travel companies (OTCs) that facilitate hotel reservations were not liable for local hotel occupancy taxes on the amount paid by consumers to book the rooms.1 Instead, the hotel tax was based on the amount paid as consideration to the hotel (the discounted price negotiated between the OTCs and the hotels). In both cases, pursuant to the applicable language in the tax ordinances, the tax only applied to a hotel "operator." Both courts determined that OTCs were not hotel "operators," and therefore were not subject to the local hotel occupancy taxes on the retail price of the rooms charged to the consumers.

Background

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 net rate. OTCs then offer reservations of the rooms to the public at the net rate, plus a service fee and/or a facilitation fee, and state and local hotel occupancy taxes (applied to the net rate). When a customer books and pays the total amount to an OTC, the OTC pays the net rate and hotel occupancy taxes to the hotel, and the hotel remits the taxes to the relevant states and municipalities.

Tennessee Decision

Procedural History

In 2008, Goodlettsville and other Tennessee municipalities joined in a class action suit against a group of OTCs2 in federal District Court. The complaint alleged that the OTCs violated various local hotel occupancy tax codes. In 2009, the District Court denied the OTCs' motion to dismiss the action against them.3 Subsequently, the parties each filed motions for summary judgment.

Applicable Tax Ordinance

The District Court examined Goodlettsville's ordinances in determining whether the OTCs properly collected the local hotel occupancy taxes at issue. A Goodlettsville ordinance imposed a tax upon the "privilege of occupancy in any hotel of each transient in an amount equal to three percent (3%) of the consideration charged by the operator."4

Analysis

In reaching its determination that the OTCs were entitled to summary judgment in their favor, the Court addressed its prior ruling against the OTCs. The Court had initially denied the OTCs' motion to dismiss the case in 2009 because of the allegations contained within the City of Goodlettsville's complaint. The complaint alleged that the OTCs took a "possessory" interest in the hotel rooms that were marketed through the OTCs' Web sites. However, after the discovery phase, the evidence showed the contrary. Based on the evidence, the OTCs "do not purchase or take title to hotel rooms and do not pay the hotels before a booking is made." Rather, the Court found that the OTCs merely contract for "the right to market an allotment of rooms."

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