Taxing Online Travel Companies: The North Carolina Business Court And The Fourth Circuit Don't See It The Same Way
Have you ever booked a hotel room through an online reseller like Hotels.com, Priceline, or Orbitz? If you have, you might be interested in this post, even though you might not otherwise be interested in an issue of North Carolina state tax law.
Those companies, and other internet resellers of hotel rooms, have a significant tax dispute pending in North Carolina's courts. And right now, the Fourth Circuit is directly at odds with the North Carolina Business Court on the proper outcome.
The tax problem comes up because the customer is paying these companies more than the price at which the online company purchases the hotel rooms from the hotel operator. That's obvious, that's how they make a profit. What's not so obvious is that the online companies charge Occupancy Tax based on the full price of the room, but they only remit tax calculated at the lower price they paid to buy the room. They keep the difference, which they call a "nonitemized service fee."
This questionable practice has led to a flurry of litigation by municipalities against Hotels.com, Priceline, and other online vendors, like Orbitz and Travelocity. Four of those cases are being litigated in the North Carolina Business Court, brought by Dare County, Mecklenburg County, Wake County, and Buncombe County. Similar cases are pending throughout the country.
Last week, the online travel companies scored a big win when the Fourth Circuit affirmed the grant of a Motion to Dismiss in a case brought by Pitt County, in Pitt County v. Hotels.com, L.P. (I read about that decision on the North Carolina Appellate Blog). The Fourth Circuit ruling is apparently the first appellate decision in the country on this issue, but that ruling is directly at odds with a decision by Judge Diaz in the Business Court, Wake County v. Hotels.com, L.P., 2007 NCBC 35 (N.C. Super. Ct. Nov. 19, 2007).
Here's a quick primer on the pertinent tax law: The Occupancy Taxes result from local legislation at the county level, which is enabled by the North Carolina Legislature. The grant of authority to impose an Occupancy Tax is tied to the authority to impose a Sales Tax.
Wake County's Occupancy Tax is typical. It imposes a tax "on the ‘gross receipts derived by any person, firm, corporation, or association from the rental of any room, lodging or accommodation furnished by a hotel, motel, inn, tourist camp, or similar place within the County that is subject to the State sales tax imposed under Section 105-164.4(a)(3) of the North Carolina General Statutes."
The Sales Tax, however, applies only to "retailers," including "operators of hotels." The online companies argue that they aren't "operators of hotels," and that they therefore can't be subject to the Occupancy Tax. That's the argument accepted by the District Court for the Eastern District of North Carolina in the Pitt County case, which is the ruling affirmed last week by the Fourth Circuit.
The Fourth Circuit held that an online travel company does not meet this "statutory definition of a 'retailer' because it is not a business that is of a type similar to a hotel, motel, tourist home, or tourist camp," and that "[w]e therefore agree with the district court that the County is not entitled to collect the occupancy tax."
In addressing Pitt County's argument that this construction created an unfair loophole in favor of the on-line companies, the Fourth Circuit held:
The loophole . . . if indeed it is a real one, may simply indicate that the North Carolina General Assembly failed to consider the tax consequences of a situation where hotel rooms are rented first at wholesale and later re-let at retail rates to consumers. On the other hand, the statute's language may be the result of the legislature's deliberate choice to limit the application of the sales tax to the actual operators of hotels and similar type businesses. In either case, we may not expand the statute's reach beyond what its plain language will bear.
This isn't how Judge Diaz saw it when he ruled on the issue. Judge Diaz noted the District Court's Pitt County opinion but declined to follow it, instead focusing on the fact that the internet companies were collecting the tax and not remitting it to the appropriate taxing authorities. He held:
On these facts, it does not matter whether (as Defendants urge) the reach of the Occupancy Tax is co-extensive with that of the state sales tax or whether Defendants “operate” hotels. Instead, by (1) collecting the tax from consumers and then failing to remit the full amount to Plaintiffs, and (2) not filing returns as required by law, Defendants have not complied with the plain language of the Occupancy Tax (and the corresponding enabling acts) requiring them to account for and remit all such taxes.
Op. at Par. 72. The Fourth Circuit didn't discuss that point in its opinion, although it is clear from the decision that the online resellers were collecting the full amount of the tax from Pitt County customers and keeping it.
What's next? Well, the Business Court cases are moving along with discovery, and presumably towards a summary judgment motion. The deadline for that filing is September 2, 2009. If the statutory interpretation issue gets to North Carolina's appellate courts, they certainly don't have to follow the Fourth Circuit's views on this issue of state tax law. And the Legislature, of course, can fix the whole problem, at least on a prospective basis. I did a quick check of the General Assembly's website, but it doesn't look like there is any relevant pending legislation.