D.C. Judge Rules Online Travel Companies Must Pay Hotel Tax on Their Services

September 26, 2012

On Monday, a District of Columbia judge ruled that online travel companies must collect the city’s 14.5 percent hotel tax on their services. The decision was not entirely unexpected: Judge Craig Iscoe had previously issued an order last October indicating his sympathy with the city’s argument and we chalked it up as such in our report on the topic. D.C. has since amended its statute to be clearer, but this lawsuit about the old statute, and the city’s claim for years of uncollected taxes, remained.

For those unfamiliar, cities across the country have been suing online travel companies (like Travelocity, Expedia, Orbitz, Hotels.com, etc.), demanding that they pay hotel tax on the services they provide to customers. The “OTCs” already collect hotel taxes based on the amount received by hotels from the transactions. We’ve argued that (1) hotel taxes should apply only to amounts received by hotels, and that any effort to tax services should be in the form of a services tax, not a hotel tax, and (2) cities seeking to change these practices should do so through legislation and not litigation for retroactive collections. (In the D.C. case, it’s some $200 million.)

The statute states that the hotel tax shall be imposed on “the gross receipts from the sale of or charges for any room or rooms, lodgings, or accommodations furnished to a transient by any hotel, inn, tourist camp, tourist cabin, or any other place in which rooms, lodgings, or accommodations are regularly furnished to transients.” D.C. Code § 47-2002 (prior to April 2011 amendment).

The judge rightly concluded that the case boils down to a dispute “over the characterization of Defendants’ services.” Op. 6. The OTCs argue that they do not sell or charge for hotel rooms or furnish rooms; the City argues that any charge related to furnishing a hotel room should be subject to hotel tax and that OTCs are vendors. Op. 12-13.

The judge forthrightly then states: “Both the Defendant and the District read the statute in the manner a well-informed person might. Because the plain meaning of the statute is open to two reasonable, yet opposing, interpretations, it is necessary . . . to turn to other tools of reasonably statutory interpretation in order to discern the purpose of the statute and avoid absurd results.” Op. 13.

This is wrong. When tax statutes are ambiguous, judges are duty-bound to rule in favor of the taxpayer. District of Columbia v. Acme Reporting Co., 530 A.2d 708, 712 (D.C. 1987). Judge Iscoe acknowledges this precedent, but ignores it, citing a need to “not work an obvious injustice.” Op. 10, 11. In a section entitled “Analysis of the Statutory Structure and Legislative History” (which contains no legislative history, since there is no legislative history of a desire to tax online travel services), Judge Iscoe explains the “injustice” he’s stopping in a footnote: “[T]he Defendants’ interpretation of the statutes could enable a hotel to avoid taxes by simply creating a shell company to act as intermediary between customers and the hotel.” Op. 15 n.13.

In other words, because a hotel could spin off its reservation facilitation service into a separate entity and because those transactions would then not be subject to hotel tax, it would be unjust not to subject existing online travel services to hotel tax. The logic is tortured, since the hotel tax would still be collected on its intended object: hotel rooms. Ancillary services would not be taxed and that is not inconceivable, particularly as the D.C. sales tax exempts services unless explicitly taxed.

Judge Iscoe also concludes that the OTCs are selling facilitation services “in the District” even when they are located outside D.C. and working with a customer who is not a resident of D.C. but traveling there.

The judge still must rule on damages, but then either party may appeal the case. They should, since the legal analysis is quite unconvincing.

The case is 2011-002117 B, District of Columbia v. Expedia, Inc., et al. The Washington Post has Monday’s order here.

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