California Supreme Court Rules on San Diego Online Travel Company Case

DALLAS, Dec. 16, 2016 /PRNewswire/ -- On December 12, 2016, the California Supreme Court provided a thorough analysis of San Diego's ordinance governing the taxability of transient lodging as it relates to online travel companies (OTCs). Under San Diego's ordinance, the obligation to collect the city's transient tax rests with "operators" (e.g., hotel proprietors). In re Transient Occupancy Tax Cases¹ centers around whether OTCs qualify as "operators" within the meaning of the ordinance and whether they are required to collect the transient occupancy tax on the markup retained by them above the wholesale amount they agreed to remit to the hotels. 

The court ruled that San Diego's ordinance imposes tax on "the [lodging] Operator," and subjects the operator alone to the assessment of tax. The court added that the ordinance did not appear to contemplate that the city could levy tax against an intermediary entity like an OTC.

The court identified the OTCs' business under assessment as a "merchant model" transaction, so termed because the OTC takes the place of the merchant almost entirely. The operator of the hotel is liable for tax on the wholesale cost of the room, but the OTCs handle all financial transactions related to the hotel reservations and are even listed as the merchant on the customer's credit card receipt. However, the court notes that at no time do OTCs "own, operate or manage hotels, maintain an inventory of rooms, or possess or obtain the right to occupy any rooms."² OTCs even collect the transient occupancy tax (on the wholesale price) and transfer the tax and lodging cost to the hotel, which remits the tax.

The court focuses on the language of the San Diego ordinance and reiterates its unwillingness to expand the tax base beyond a plain reading of the text. San Diego made the argument that the OTCs should be considered agents of the hotel operations and, therefore, liable for tax on their markup charges under an agency theory. The court found this unpersuasive: "That the OTCs act as hotels' agents or intermediaries for the limited purpose of charging and collecting the rent, however, does not subject the OTCs to assessment as an operator."³

¹ In re Transient Occupancy Tax Cases, California Supreme Court, No. S218400 (December 12, 2016).
² In re Transient Occupancy Tax Cases, California Supreme Court, No. S218400 (December 12, 2016).
³ In re Transient Occupancy Tax Cases, California Supreme Court, No. S218400 (December 12, 2016).

About Ryan
Ryan is an award-winning global tax services firm, with the largest indirect and property tax practices in North America and the seventh largest corporate tax practice in the United States. With global headquarters in Dallas, Texas, the Firm provides a comprehensive range of state, local, federal, and international tax advisory and consulting services on a multi-jurisdictional basis, including audit defense, tax recovery, credits and incentives, tax process improvement and automation, tax appeals, tax compliance, and strategic planning. Ryan is a five-time recipient of the International Service Excellence Award from the Customer Service Institute of America (CSIA) for its commitment to world-class client service. Empowered by the dynamic myRyan work environment, which is widely recognized as the most innovative in the tax services industry, Ryan's multi-disciplinary team of more than 2,100 professionals and associates serves over 12,000 clients in more than 40 countries, including many of the world's most prominent Global 5000 companies. More information about Ryan can be found at ryan.com.

Available Topic Expert(s): For information on the listed expert(s), click appropriate link.
Jerry Lynch
http://www.profnetconnect.com/jeremiahlynch

TECHNICAL INFORMATION CONTACTS:

Jeremiah T. Lynch
Principal
Ryan
212.871.3901
[email protected]

John Lyon
Principal
Ryan
213.627.1719
[email protected]

SOURCE Ryan

Related Links

http://www.ryan.com