Pennsylvania Holds that Expedia is Not Subject to Hotel Tax
In City of Philadelphia v. City of Philadelphia Tax Review Board, No. 216 C.D. 2011 (Feb. 2, 2012), the Pennsylvania Commonwealth Court (“Commonwealth Court”) held that Expedia, Inc. (“Expedia”) was not an operator of a hotel and, therefore, was not subject to the City of Philadelphia’s (“City”) Hotel Room Rental Tax (“Hotel Tax”).
As summarized in the opinion, Expedia is an online travel service that allows consumers to make travel arrangements, including reservations for hotel rooms, flights, rental cars, and events through its website. Expedia operates through contracts with various hotels in many cities throughout the United States and abroad, including the Philadelphia area. The contracts between Expedia and the hotels allow Expedia to book room reservations for travelers at the hotels at a discounted net rate. When Expedia quotes a room rate to a customer on its website, the quote includes the discounted room rate, a facilitation fee, service fees and a tax recovery charge representing an estimate of the City’s Hotel Tax (and other hotel taxes, if applicable) based upon the net rate charged for the room by the hotel. The hotel calculates the City’s Hotel Tax based solely upon the net room rate, exclusive of any extra fees. The customers pay Expedia for these charges, and Expedia then provides the customer with a confirmation number and a printable receipt.
In 2007, the City’s alleged Expedia owed $1,053,447.40 for unpaid Hotel Tax for the period 2001 through 2005, including interest and penalties. This amount was based on the actual rate Expedia charged to its customers, inclusive of fees. Expedia appealed the assessment to the City’s Tax Review Board (“TRB”) and argued that: (1) it was not subject to the Hotel Tax because it was not a hotel operator; (2) that the fees it charged and retained were not subject to the Hotel Tax; and (3) that the imposition of the Hotel Tax was prohibited by the Commerce Clause of the United States Constitution.
The TRB found in favor of Expedia, holding that Expedia was not a hotel “operator” as defined by the Philadelphia Code because it could not, independent of hotel management, reserve and rent hotel rooms, and that Expedia’s only activities were to provide information about hotel availability, amenities, and rates to potential travelers, and to collect payment from the travelers.
The City appealed the TRB decision to the Common Pleas Court. And when that court denied the City’s appeal and affirmed the TRB’s decision, the City appealed the matter to the Commonwealth Court.
On appeal, the City first argued that the TRB committed legal error in concluding that only a hotel can be an “operator” under the Philadelphia Code. The Commonwealth Court, however, disagreed. As set forth in Philadelphia Code, an “operator” is defined as:
Any individual, partnership, non-profit or profit-making association or corporation or other person or group of persons who maintain, operate, manage, own, have custody of, or otherwise possess the right to rent or lease overnight accommodations in any hotel to the public for consideration. § 19-2401(7).
Thus, the Court reasoned that ownership or control of the premises is the relevant inquiry and, in the case at hand, the hotel, not Expedia, controlled access to the hotel rooms, the right to rent those rooms, and any accompanying amenities.
The City next argued that the TRB erred by misinterpreting the Philadelphia Code to hold that a taxable rental “transaction” only occurs at the traveler’s point of arrival at the hotel. Under Philadelphia Code , however, “transaction” is defined as the “activity involving the obtaining by a transient or patron of the use or occupancy of a hotel room,” and “occupancy” is defined to include the “use or possession or the right to the use or possession…of any room in a hotel.” Thus, the City’s argument failed because Expedia neither provides its customers with the use or possession of a room, nor the right to the use or possession of a room. Moreover, because Expedia not only paid the hotel the quoted room rates, but also the applicable Hotel Tax, it is the hotels that ultimately receive the consideration for the room rentals, not Expedia. Thus, the Commonwealth Court affirmed the TRB decision and found that Expedia was not subject to the Hotel Tax based upon the full amount of the fees charged to its customers.
The issue of whether online travel sites, like Expedia, are subject to state and local taxes has been heard by many courts across the United States. Although a few courts have sustained the assessments, the vast majority of courts have ruled that online travel sites are not subject to state and local hotel taxes.
If you have any questions regarding the contents of this newsletter, please contact the following attorneys in the firm’s State and Local Tax Practice Group.
| Chicago (312) 558-5600 | San Francisco (415) 591-1000 |
| Robert F. Denvir | Charles J. Moll III |
| Alan Lindquist | Troy M. Van Dongen |
| Bradley R. Marsh | |
| Jocelyn M. Wang | |
| Dina Bronshtein Segal | |
| Jasmine I. Tollette |