What Does It Potentially Mean for Sales Tax Issues Involving Out-of-State Retailers?

For over 10 years, online travel companies (OTCs) hotel occupancy tax cases have been initiated by a large number of individual cities, municipalities and states all over the country.  At this time over 100 lawsuits have been initiated.  The central argument in most cases is whether these OTCs should be required to remit the hotel tax on their markup / profit.  For example, assume the hotel and the OTC agree to a contract whereby the hotel will receive $70/night and the OTC charges $100 for a particular room.  Assuming the hotel tax rate is 10% the OTC will remit $80 to the hotel ($70 room charge plus the $10 hotel tax) and keep the remaining $20 (OTC markup).

Until recently the OTCs were defeating most of these cases at the State and Federal Court level. The OTCs argued that they did not CONTROL the hotel room (i.e., inventory). However, OTCs are now starting to lose at the State Court level and certain Federal Courts are beginning to lean the other way.

The cases all argue that these OTCs (Travelocity, Expedia, etc.) should be responsible for remitting the hotel occupancy tax on their mark-up (i.e., hotel room price less what is paid to the hotels). And as you can guess, these cases mostly hinge on whether or not the OTCs actually CONTROL the hotel rooms they are selling. Additionally, many of these suits are also arguing that the hotel tax was actually collected by the OTC and not remitted. However, these arguments have generally been found to have no merit.

One of the more important OTC hotel tax cases is ‘San Antonio, Texas vs. Hotels.com’.  Actually, this case was converted to a class action case (Civil No. SA-06-CA-381-OG) and now includes 173 cities in Texas with the notable exception of Houston. In addition, the case involves not just Hotels.com but as many as 10 other OTCs.

In 2006 the US District Court (Western – ‘San Antonio, Texas vs. Hotels.com) found in favor of the plaintiffs via a jury trial and awarded a $20 million judgement. However, the case was appealed and stuck in limbo. Eventually the US Fifth Circuit (Court of Appeals) presented an initial ruling against the OTCs and increased the judgement to $84 million. Hotels.com is currently attempting to refute this decision. So there is no final decision yet. San Antonio has also presented final arguments to the appeals court.

The bottom line is that over the last 10+ years the OTCs have been pressured to collect hotel tax on their markup. And if this does happen then I am wondering why a NO NEXUS defense has not been brought up by those OTCs that have no physical or employee presence. It might be only a matter of time before OTCs are required to collect these hotel taxes. But if OTCs are required to collect and remit this hotel tax then could this then immediately have significant sales tax implications for many broker / portal type businesses remotely selling goods in services around the country. Many of those cases are now winding their way through the State and Federal Court systems.  We’ll have to wait and see what the OTC case means in the bigger Sales Tax picture.

https://taxfoundation.org/litigation-ongoing-against-online-travel-companies-hotel-occupancy-taxes  2016 article
https://www.tnooz.com/article/big-four-otas-socked-with-20-6m-hotel-tax-verdict-in-texas  2009 articlehttp://www.mrt.com/news/article/Major-cities-file-lawsuits-against-online-travel-7545261.php  2006 article

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