448 P.3d 275
Ariz.2019Background
- Online travel companies (OTCs) (e.g., Orbitz) operate booking websites that list hotel rooms, confirm reservations, collect customer payment as merchant of record, and retain markups/service fees; hotels invoice OTCs post-stay for net room rate and remit taxes to cities.
- OTCs do not own or operate the physical hotels; they contract with hotels to list inventory and provide reservation/payment/customer-service functions.
- In 2013 several Arizona cities issued multi-jurisdictional privilege-tax assessments against OTCs under Model City Tax Code (MCTC) §§ 444 and 447 for unpaid taxes on OTC markups/service fees; administrative hearing officer overturned those assessments.
- Tax court held OTCs qualify as "brokers" and are taxable under §§ 444 and 447; Court of Appeals affirmed taxation under § 444, reversed as to § 447, and allowed retroactive assessment.
- Arizona Supreme Court affirmed that OTCs are taxable under § 444 as brokers and that their markups/service fees are taxable gross income; it held OTCs are not taxable under § 447 (not "hotels").
- The Court remanded on retroactivity: MCTC § 542(b) bars retroactive assessments based on a new city interpretation or application unless the city adopted the change and gave clear notice; factual disputes about prior city notice require remand to tax court.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether OTCs engage in the "business of operating a hotel" under MCTC § 444 | OTCs perform core hotel functions (advertising, reservations, payment processing, customer support) and thus engage in operating hotels | OTCs only facilitate transactions; they do not own, manage, or run hotels and therefore are not hotel operators | § 444 applies to any "person" engaged in business activities central to keeping brick-and-mortar lodging functional; OTCs meet that standard and engage in the business of operating a hotel |
| Whether OTCs' markups and service fees are included in taxable gross income under § 444 | Markups/fees are proceeds from the taxable activity and must be included to prevent tax disparity/evasion | Markups/fees are non-lodging/commission revenue or belong to hotels; they should be excluded | Markups and service fees are proceeds from the taxable activity and are part of taxable gross income under § 444 |
| Whether OTCs qualify as "brokers"/"persons" under MCTC definitions | Cities: OTCs act for hotels for consideration, perform hotel business activity, and receive all/part of gross income; thus they fit the Code's definition of "broker" | OTCs argue they act for travelers, not hotels, and do not meet broker definition | OTCs satisfy the statutory broker definition; MCTC regulations treat brokers as taxpayers and disallow deductions for retained commissions |
| Whether MCTC § 542(b) bars retroactive assessment of taxes, penalties, and interest prior to 2013 | Cities: no new interpretation or application occurred; retroactive collection is permitted | OTCs: cities adopted a new interpretation/application in 2013 without prior clear notice, so retroactive assessments are barred | § 542(b) forbids retroactive taxation based on a new interpretation/application not due to law change unless the city adopted the change and gave clear notice; remand required to resolve factual disputes about prior notice and burden allocation |
Key Cases Cited
- City & County of Denver v. Expedia, Inc., 405 P.3d 1128 (Colo. 2017) (held OTC markups inseparable from lodging price for that ordinance)
- Travelocity.com, L.P. v. Wyo. Dep’t of Revenue, 329 P.3d 131 (Wyo. 2014) (OTCs treated as vendors; markups part of taxable sales price)
- Pitt County v. Hotels.com, G.P., LLC, 553 F.3d 308 (4th Cir. 2009) (OTCs not hotel operators under that statute)
- Louisville/Jefferson Cty. Metro Gov’t v. Hotels.com, L.P., 590 F.3d 381 (6th Cir. 2009) (rejected expansive reading to close alleged loophole)
- Mont. Dep’t of Revenue v. Priceline.com, Inc., 354 P.3d 631 (Mont. 2015) (OTCs do not fit "owners or operators" under Montana law)
- Village of Bedford Park v. Expedia, Inc., 876 F.3d 296 (7th Cir. 2017) (OTCs facilitate bookings but are not hotel operators)
- Ariz. Dep’t of Revenue v. Action Marine, Inc., 218 Ariz. 141 (App. 2008) (transaction privilege tax is an excise on gross receipts/business activity)
- Ebasco Servs. Inc. v. Ariz. State Tax Comm’n, 105 Ariz. 94 (1969) (ambiguities in revenue statutes construed for taxpayer)