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.”