City of Chicago v. Expedia, Inc
2017 IL App (1st) 153402
| Ill. App. Ct. | 2017Background
- The City of Chicago sued Expedia, Hotels.com, and Hotwire (OTCs) alleging they failed to collect and remit the Chicago Hotel Accommodations Tax (CHAT) on amounts they charged customers (2005 action; stipulated damages later calculated through 2014).
- OTCs contract with hotels to obtain negotiated net room rates; OTCs present customers a single total price composed of (a) hotel net rate, (b) OTC facilitation fee, (c) tax recovery charge (based on hotel-supplied percentages), and (d) OTC service fees; hotels receive the net rate and remit CHAT on that net rate.
- OTCs appear as merchant of record and collect payment from customers, but OTCs do not remit CHAT on their own facilitation/service fees; they pay hotels the net rate and the tax recovery charge.
- The circuit court granted partial summary judgment for the City, holding OTCs were operators/managers under the CHAT and their fees were part of the gross rental charge; it entered final stipulated judgment for the City exceeding $29 million and imposed a constructive trust on certain amounts.
- On appeal the Illinois Appellate Court reviewed statutory construction de novo and focused on whether (1) OTCs fall within "owner, manager or operator" required to collect CHAT and (2) whether OTC facilitation/service fees are included in the CHAT tax base "gross rental or leasing charge." The court ultimately reversed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether OTCs are "owner, manager or operator" required to collect and remit CHAT | OTCs sell/resell or otherwise act as operators/managers of hotel accommodations and therefore must collect CHAT | OTCs are intermediaries that facilitate reservations, not hotel owners/managers/operators | Court did not need to decide this issue because it resolved case on tax base; it also noted ordinance later amendments but declined to apply them retroactively |
| Whether the OTCs' facilitation and service fees are part of the "gross rental or leasing charge" taxed by CHAT | The total amount paid to OTCs (including OTC fees) is the taxable gross rental; fees collected at time of booking are part of rent | OTC fees compensate services (convenience, prenegotiation, aggregation), not the right to use/occupy the room, so they are not rent | Held: facilitation and service fees are not rental charges and therefore not included in "gross rental or leasing charge"; summary judgment for OTCs directed |
| Proper rule of construction for CHAT (taxing statute) | City urged expansive reading to capture OTC receipts | Defendants relied on strict construction of tax statutes in favor of taxpayer; ordinary meaning of rent controls | Court applied strict construction: unambiguous CHAT language taxes charges "in the nature of rent"; it refused to expand statute beyond its plain meaning |
| Remedies based on counts other than tax (constructive trust/accounting) | City sought constructive trust and accounting for amounts deemed collected improperly | Defendants argued basing remedies on amounts not taxable was improper | Circuit court's constructive trust award reversed as to count III; appellate court remanded with directions to enter summary judgment for defendants |
Key Cases Cited
- Midland Management Co. v. Helgason, 158 Ill. 2d 98 (Ill. 1994) (defining rent as return to lessor for use of property)
- Travelers Insurance Co. v. First National Bank of Blue Island, 250 Ill. App. 3d 641 (Ill. App. Ct. 1993) (definition of "rent" as consideration for use or occupancy)
- Van's Material Co. v. Department of Revenue, 131 Ill. 2d 196 (Ill. 1989) (taxing statutes must be strictly construed in favor of taxpayer)
- City of Houston v. Hotels.com, L.P., 357 S.W.3d 706 (Tex. App. 2011) (examining whether OTC markups are taxable as hotel occupancy charges)