The multi-year battle between online travel companies (OTCs) and state and local taxing authorities continues throughout the United States.  Under dispute is whether liability for sales and accommodation taxes should be based on the discounted rate that the OTCs pay hotels to acquire room inventory or the marked-up rate that OTCs charge customers.  Millions of dollars are at risk for the OTCs and the taxing authorities.

Court Decisions Are A Mixed Bag

Previous litigation has not yielded a clear winner as courts must decide each case based upon the varying tax laws of each jurisdiction.  As illustrated by two noteworthy decisions in 2011, this pattern continues to hold.  

In South Carolina, the Supreme Court upheld a multi-million dollar sales tax assessment against Travelscape, a wholly-owned subsidiary of Expedia.  In South Carolina, the applicable tax is not only levied on those who physically supply sleeping accommodations, but also on those that accept money in exchange for supplying hotel rooms.  The Court found that Travelscape was responsible for the tax on the full amount it received from its customers as it accepted money in exchange for supplying hotel rooms.

In Florida, a Circuit Court denied a motion for summary judgment by Orange County in its suit against Expedia and Orbitz.  In denying the motion, the Court (like many other courts) found that the applicable tax law was unclear as to whether it applied to the internet business transactions engaged in by Expedia and Orbitz as these types of transactions were not contemplated at the time the tax law was drafted and enacted.

Do the Legislatures Hold The Trump Card? 

State and local governments throughout the United States are working to update their tax laws to take into account the OTC business model either for proactive reasons or in response to unfavorable court decisions.  Perhaps most interesting, North Carolina amended its tax laws on a prospective basis effective January 1, 2011 to require the OTCs to pay sales and accommodations taxes on the full amount that they receive from their customers.  The action was in response to a court decision unfavorable to the state.  As reported by David Bracken at the News Observer, a number of the OTCs have filed a lawsuit attempting to block the application these new tax laws. 

We must now wait and see whether the OTCs or the taxing authorities will emerge victorious from this latest round, and whether it will in fact be the last round in this long battle.

Thank you to Beatrice Larkin for her assistance with this posting.