City of San Antonio, Texas v. Hotels.Com, L.P., et
876 F.3d 717
| 5th Cir. | 2017Background
- 173 Texas municipalities sued online travel companies (OTCs) claiming OTCs must collect and remit hotel occupancy taxes on the full retail amount paid by travelers (discounted room rate + OTC service fee).
- OTCs operate under a merchant model: hotels set discounted room rates and issue prepaid reservations in guests’ names; OTCs collect payment (including a separate service fee and tax-recovery charge), retain the service fee, and remit the discounted room rate and taxes to hotels.
- Municipal ordinances at issue define the tax base in variants: Dallas-type taxes “consideration paid by the occupant to the hotel”; San Antonio–type taxes the “total price” including goods/services provided by the hotel.
- A jury found OTCs “control” hotels; the district court later held the taxable base included the retail rate paid to the OTC and awarded substantial damages to the cities.
- The Fifth Circuit reviewed whether, under Texas law, the taxable “cost of occupancy” includes the retail rate (including OTC service fees) or only the discounted room rate paid to the hotel.
Issues
| Issue | Plaintiff's Argument (Cities) | Defendant's Argument (OTCs) | Held |
|---|---|---|---|
| Whether the hotel occupancy tax applies to the retail rate (room + service fee) paid to the OTC | The retail rate is the "cost of occupancy" and thus taxable | Only the discounted room rate actually paid to the hotel is the taxable cost of occupancy | Held for OTCs: taxable amount is the discounted room rate paid to the hotel; service fee not taxable |
| Whether OTCs "control" hotels for ordinance liability | OTCs exercise control over hotel bookings and thus fall within "control" language | OTCs do not own, operate, or manage hotels; they merely facilitate reservations | Not reached as dispositive: because tax base excludes service fee, OTCs had no liability under ordinances |
| Whether the Texas intermediate appellate decision in Houston controls the interpretation of "cost of occupancy" | Cities: class record and jury verdict justify a different interpretation than Houston | OTCs: Houston applies and, under Texas law, should be followed | Fifth Circuit followed Houston v. Hotels.com and applied pro-taxpayer construction; concluded Houston controls |
| Role of tax-construction principles (ambiguity / pro-taxpayer rule) | Cities: ordinances should be read to reach retail rate given remedial purpose | OTCs: ambiguous language must be construed strictly against taxing authority, favoring taxpayer | Court applied pro-taxpayer presumption and resolved ambiguity for OTCs |
Key Cases Cited
- Broussard v. State Farm Fire & Cas. Co., 523 F.3d 618 (5th Cir. 2008) (standard of review for JMOL on appeal)
- In re Complaint of John E. Graham & Sons, 210 F.3d 333 (5th Cir. 2000) (federal courts must predict state supreme court law in diversity cases)
- Transcontinental Gas Pipeline Co. v. Transportation Ins. Co., 953 F.2d 985 (5th Cir. 1992) (applicability of state-law prediction principles)
- Stoner v. New York Life Ins. Co., 311 U.S. 464 (U.S. 1940) (lower federal courts should follow intermediate state court decisions absent convincing evidence state supreme court would rule otherwise)
- TracFone Wireless, Inc. v. Commission on State Emergency Commc’ns, 397 S.W.3d 173 (Tex. 2013) (tax statutes construed strictly against taxing authority)
- City of Houston v. Hotels.com, L.P., 357 S.W.3d 706 (Tex. App.—Houston [14th Dist.] 2011) (intermediate appellate decision holding taxable amount is the discounted room rate paid to hotels)