A Los Angeles trial court has ruled that online travel companies such as Expedia, Travelocity and Priceline.com (the “OTCs”) are not hotel “operators” or “managing agents” that must pay Transient Occupancy Taxes (“TOT”) on fees charged to customers for online bookings. The case is the first of its kind in California and arises out of the City of Anaheim’s (the “City”) efforts to collect more than $21 million in back taxes from several OTCs under its TOT ordinance.
 

The OTCs purchase available rooms directly from hotels at a negotiated wholesale rate and sell the rooms online to customers at a retail rate, usually with a significant markup. The OTCs, however, pay TOT to cities based only upon the wholesale price, not the retail price. The City’s TOT ordinance imposes a TOT upon room “rent” charged by hotel “operators” or “managing agents.” The City claimed the OTCs are underpaying TOT and sought to collect the back taxes through an administrative collection proceeding. The OTCs asserted that they are not hotel “operators” or “managing agents” because they only operate and manage websites, not hotels, and therefore are exempt from paying the TOT on the retail markup above the hotel’s price.     
 

After an administrative hearing officer found in favor of the City, the OTCs filed a lawsuit. The court reversed the hearing officer, finding that the OTCs are not “operators” or “managing agents” because they do not control or run hotels. The court noted that the OTCs do not have the power to make business decisions or set corporate policy for a hotel, including setting the wholesale rate at which a hotel is willing to sell a room to an OTC. While the OTCs are “agents” of a hotel for the limited purposes of marketing rooms and collecting rates, that is not enough to make them a “managing agent” under the City’s ordinance. Consequently, the retail markup the OTCs charge is not room “rent” subject to the TOT.    
 

The City has indicated that it will appeal the trial court’s decision. Cities with similar TOT ordinances or those seeking refunds from OTCs for back TOT should monitor the progress of this case. BB&K will be doing so as well. 

If you have any questions regarding this case or its implications to your city, please contact your BB&K Municipal Law attorney, Kelly J. Salt or William J. Priest.