The city of Anaheim, California argues that they are owed hotel occupancy taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. es from online travel booking services such as Priceline.com, Expedia.com, and Orbitz.com. The city’s hotel tax, which is charged to anyone who rents a room, is based on the retail price of the hotel room. The online companies facilitate transactions and receive from consumers a payment that is not included in calculating the hotel tax the consumer must pay. The city filed a lawsuit to challenge this practice.
The litigation is not being managed by city lawyers but rather by outside private contingency fee lawyers. Contingency fee lawyers are not paid for their services unless they win the case, in which case they receive a percentage share of the winnings. If the contingency fee lawyers succeed in winning the case, the city may collect substantial revenue from the online companies, with a share going to the private lawyers.
In a case pending before the California Court of Appeal, Priceline.com, Inc. v. City of Anaheim, the online travel companies argue that the private lawyers cannot impartially enforce the city’s tax laws because of their significant financial interest in the outcome of the case. Further, they argue that the city has failed to maintain sufficient control over the lawyers’ activities.
The Tax Foundation’s amicus curiae brief argues that Anaheim must even-handedly enforce its tax code, precluding the city’s use of contingency fee attorneys. The brief also urges the court to evaluate the sufficiency of the Anaheim’s oversight mechanisms, particularly in light of the recent failure and termination of the federal Internal Revenue Service’s private debt collection program.
Private Debt Collectors at the Federal Level Went Overboard Despite IRS Oversight
In an attempt to cut costs and increase revenue from back-taxes, the IRS contracted with private debt collection agencies to collect tax debts for the United States. These companies were paid by the United States on a contingency fee basis, based on the amount of tax debt that they collected.
When the IRS deals directly with taxpayers, it has governmental discretion to negotiate settlements with taxpayers, including the power to suspend or cancel debts. Private collections cannot make such offers, so the IRS limited private debt collectors to “easy” cases that did not require any governmental discretion to resolve.
Unfortunately, it has become clear that few if any cases do not require governmental discretion to resolve, so the private collectors were often assigned cases that they could not resolve. Much to the exasperation of taxpayers, people were pressured into sending their payments instead of being referred to the IRS where they could have received a more beneficial settlement. This practice was attributed to the private debt collectors’ financial interest in payments.
The failure of the program occurred despite extensive oversight of the private debt collection agencies’ practices by the IRS. The IRS mobilized: (1) a taxpayer complaint process; (2) ongoing reviews of private collector actions; (3) rules regulating referrals back to the IRS in cases where taxpayers were found to be unable to pay; (4) a dispute appeals process; (5) comprehensive training materials; (6) active regulation of private collector training programs; (7) direct oversight by IRS employees meant to ensure that cases were handled properly; and (8) active procedural and legal review of the private collection processes. Nevertheless, these abuses occurred, and the program’s inefficiency led to its termination in early 2009.
Lessons of the IRS’s Experience for Anaheim
The IRS’s experience with its private debt collection program revealed that despite even the most ardent attempts to ensure that private parties performing government functions act neutrally, it can still occur. The IRS employed an impressive array of oversight mechanisms, which still did not completely prevent the private debt collection agencies’ self interests from undermining the neutrality of the IRS’s tax debt collection.
The Tax Foundation’s argues that the court should be critical of the Anaheim’s claim that its oversight has been completely effective. The IRS’s experience conveys the idea that to ensure absolute neutrality, governmental oversight would have to be nearly flawless and it is difficult to imagine such a system in light of the failure of the IRS’s efforts.
In the Priceline case, the companies argue that the city’s contingency fee attorneys have acted without sufficient oversight and that their autonomy has undermined the neutral administration of the city’s tax law. The Tax Foundation urged the court to evaluate the sufficiency of the city’s control mechanisms based on the IRS’s experience with its private debt collection agencies to determine if the requisite flawless oversight has occurred in this case. If it has not, the court should rule in favor of the online travel companies.
The authors would like to acknowledge the assistance of Edward Teyssier for acting as pro bono local counsel for the Tax Foundation in the filing of this amicus curiae brief.Share