Cities versus Online Travel Companies

Abstract

This article examines suits by municipalities against online travel companies (OTCs) for not remitting the appropriate room occupancy tax. At issue is whether OTCs should collect tax on the amount they pay hotels for rooms or on the higher amount charged consumers. This article describes the business structure of OTCs as related to tax collection and discusses legal issues and recent court decisions as well as state and federal legislative proposals to address occupancy tax issues. At this time, it is not possible to cite a single rule that applies in all situations due to the numerous state and local laws and court holdings in relation to this matter. A key question involves whether OTCs are agents for hotels, as argued by many municipalities, or if instead the OTC acts as a personal shopper for would-be guests. In the agency model, the OTCs are in effect selling rooms subject to occupancy tax; while in the merchant model, the OTC would be providing a service, rather than rooms themselves, and the service would not be subject to occupancy taxes. A key element in the tax liability determination is the physical presence of a business. Although the U.S. Supreme Court has issued holdings on physical presence and other issues relating to occupancy taxes, the Court has not spoken on what constitutes physical presence. Lower courts have been divided on matters relating to occupancy taxes. Given conflicting holdings, the matter’s resolution may rest with the Supreme Court, if it chooses to hear this matter.