SAN DIEGO — The city of San Diego's plans to collect additional taxes from online travel companies have just gone offline, thanks to the California Supreme Court.

On Dec. 12, 2016, according to a news release, the court released an analysis on the case In re Transient Occupancy Tax Cases. The lawsuit argued that OTCs are not considered operators for the purposes of San Diego's tax law, and are therefore not required to collect the transient occupancy tax on the markup retained by them above the wholesale amount they agreed to remit to the hotel.

Typically, OTCs such as Orbitz and Expedia purchase rooms from hotels in bulk and then sell them to consumers at discounted rates. For In re Transient Occupancy Tax Cases, the city of San Diego was arguing that OTCs operating in its jurisdiction had to pay the transient occupancy tax on the markup they made selling rooms to consumers.

“These kinds of cases have been really heavily litigated over the last 10 years,” Jeremiah Lynch, principal in charge at Ryan, a tax-services firm, told The Northern California Record. “What has happened, which is often the case when technology changes an industry, is that city and localities start to wake up to these changes and try to find new ways to use them to generate revenue. In this case, the city of San Diego is really hurting for money and looking for creative ways to make money.”

He further explained that in many similar cases with OTCs, the conflict typically comes down to a debate over what happens to any taxes levied on the cost of the hotel room. It becomes a question of who pays them: the hotel operator or the OTC?

“In most of the cases I have followed or worked on, the OTC loses,” Lynch added. “My guess is the OTCs really only win these sort of cases about 20 percent of the time.”

However, in the case of In re Transient Occupancy Tax Cases, the local statute stipulated that the operator was responsible for paying the transient occupancy tax and specifically stated that in this case, the operator is the owner of the hotel rooms.

“In a lot of cases similar to this, courts will look at statutes in other cities for guidance,” Lynch said. “But in this case, it was pretty clearly specified that the OTC was not responsible.”

The California Supreme Court made it clear that the OTCs' business operations are defined as a “merchant model” transaction, because the OTC takes the place of the seller of the hotel rooms, but not the role of the actual property owner. And so the court ruled that because at no time do OTCs own, operate or manage hotels, maintain an inventory of rooms, or possess or obtain the right to occupy any rooms they are not responsible for the taxes in question.

Looking to the future, Lynch said that continuing growth of e-commerce will lead to more cases of this nature.

“In general, OTCs seem to have been so heavily litigated that the industry is mostly satisfied with the way things are,” he said. “But localities are already taking interest in newer innovations in the hospitality industry such as Airbnb, which will lead to a new generation of similar legal fights.”

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