Wednesday, January 25, 2012

If at First You Don’t Succeed . . .

Rusty Little

The battle between online travel companies (“OTCs”) such as Expedia, Inc. and state taxing jurisdictions over the taxability of their “facilitation fees” has been raging for quite some time now. At issue is whether the service or facilitation fee that the OTC charges hotels for finding a customer and booking a room is subject to any applicable hotel occupancy tax. When this issue has been litigated, the OTCs have had mixed results in various jurisdictions all over the country but in most cases, the courts have ruled that the facilitation fees are subject to tax based on interpretations of individual state or local statutes.

On November 29, 2011, the Appellate Division of the Supreme Court of New York reversed a lower court’s order which had allowed New York City to change its hotel occupancy tax rules to tax the entire amount paid by a customer for a hotel room (including the portion attributable to the OTC’s facilitation fee). (See Expedia, Inc., et al. v. City of New York Dep’t of Finance, 2011 NY Slip Op 08648 (App. Div. 1st Dep’t, Nov. 29, 2011)).

The Appellate Division unanimously ruled that the statute (Local Law 43 enacted in 2009) violated the New York Constitution. The Appellate Division noted that “the plain language of the enabling legislation did not clearly and unambiguously provide the City with broad taxation powers with respect to imposing a hotel occupancy tax. Rather, it permitted the City to impose the tax on ‘hotel occupants.’” In other words, the statute permitted tax to be assessed on the charges for the room but not on the facilitation fees, and the City should not be allowed to arbitrarily expand the definition of the tax base.

Not surprisingly, the City has filed a motion to re-argue and/or appeal the case and “try again.” Among the City’s arguments is one that the Appellate Division “overlooked or misapprehended the facts or law” in its reversing decision. The City also argues that the statute changed the method of calculating the occupancy tax and that the tax is based on the full price of the room “regardless of whether such an amount is received from a hotel occupant by a hotel operator, or a room marketer.”

With regard to post-2010 facilitation fees, the motion filed by the City is somewhat of a moot point anyway because legislation was passed in 2010 that does in fact give the City the right to subject the facilitation fees to tax. Regardless of the outcome of this case, this is another example of a taxing jurisdiction pushing their existing tax statutes to the limit and/or enacting new tax statutes, to target business models which would otherwise legitimately avoid tax.

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