Monday, December 19, 2016
Cal Supreme Court issues major decision on whether transient occupancy taxes to be collected by online travel companies (and cities everywhere should consider re-writing their TOT codes)
Last week, the California Supreme Court issued a tremendously important case for the land use world (30 attorneys are listed on the papers, and you can imagine the army of associates working behind the scenes). The case, In re Transient Occupancy Tax Cases, No. S218400, 2016 WL 7187624 (Cal. Dec. 12, 2016), concerns the amount of transient occupancy tax (TOT) due when customers purchase a hotel room through online travel companies (OTCs). The issue, which may seem arcane at first, is a very big deal because TOT tax is one of those "welcome stranger" taxes not paid by city residents that became popular with the fiscalization of land use that arose after property tax revolutions forced cities to rely on more esoteric forms of funding. In San Diego, the TOT tax is 6%, more than sales taxes in many places.
In simple terms, the case is about whether TOT is owed on the "wholesale" price for which hotels contract with OTCs, or whether TOT is owed on the amount the customer pays (the "wholesale" price plus some OTC profit and fee increment--see below for the detailed description). The legal issue was one of code interpretation. The California Supreme Court held that under San Diego's existing TOT provision the tax is only due on the wholesale price. That is the bad news for cities; the good news is that the Court based its decision only on code interpretation, which could easily be re-written to specifically address and include OTCs.
This is an important case for cities across the country to read carefully. Moreoever, cities will want to contemplate re-writing their TOT ordinances to explicitly reference OTCs. This case--and its excellent briefing--provides a guide on how to do so for those local governments that need guidance.
Defendants here were a who's who of OTCs including: Hotels.com, L.P.; Priceline.com, Inc.; Travelweb LLC; Expedia, Inc.; Hotwire, Inc.; Hotels.com G.P., LLC; Travelocity.com, LP; Site59.com, LLC; Orbitz, LLC; Travelnow.com; Lowestfare.com, LLC; Trip Network, Inc. (doing business as Cheaptickets.com); and Internetwork Publishing Corp. (doing business as Lodging.com).
Below are several useful excerpts. Here is the Court describing the OTC business arrangement:
San Diego contends the tax base for calculating the tax must be the full amount of the payment the customer is charged to obtain occupancy. In San Diego's view, the stated purpose of the tax—“It is the purpose and intent of the City Council that there shall be imposed a tax on Transients” (San Diego Mun. Code, § 35.0101, subd. (a))—reflects a legislative focus on the transaction between the OTC and the customer. The statutory definition of rent—“the total consideration charged to a Transient as shown on the guest receipt for the Occupancy of a room” (San Diego Mun. Code, § 35.0102)—in San Diego's view, shows the tax base was intended to be the total amount quoted to, charged to, and paid by the customer, not the lesser amount the hotel has agreed to accept as its share of the rental proceeds; indeed, a customer cannot obtain the privilege of occupancy by paying only the amount the hotel nets on OTC transactions nor anything less than the total amount quoted and charged to him or her. Moreover, San Diego observes, the tax is determined and collected at the same time the room is booked (id., § 35.0112, subd. (a))—the “taxable moment,” as San Diego calls it.