876 F.3d 296
7th Cir.2017Background
- Four OTAs (Expedia, Priceline, Travelocity, Orbitz groups) sell reservations under a "merchant model": customers pay the OTA, which lists a single price composed of the hotel’s room rate plus OTA fees and an estimated tax line item; hotels invoice OTAs post-stay for the hotel’s room rate plus taxes and remit taxes based on the hotel-set rate.
- Thirteen Illinois municipalities sued the OTAs claiming unpaid hotel-occupancy taxes because OTAs charge customers more than the hotel-set room rate but municipalities receive tax remittance only on the hotel-reported room rate.
- Municipal ordinances fall into three types: (1) tax duties placed on hotel owners/operators/managers; (2) tax on persons engaged in the business of renting hotel rooms (gross rental receipts); (3) hybrids combining both approaches and record/return duties.
- The district court granted summary judgment for the OTAs against all but Lombard; Lombard won below. Both sides appealed.
- The Seventh Circuit reviewed de novo and interpreted the municipal ordinances under Illinois statutory-interpretation principles, considering plain meaning, noscitur a sociis, and tax-law strict-construction rules.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether OTAs are "owners" of hotels/rooms | OTAs control availability and effectively sell rooms; thus they own the right to rent rooms | OTAs have no possessory rights, cannot convey or possess rooms; they only transmit reservations | OTAs are not owners; summary judgment for OTAs affirmed |
| Whether OTAs are "operators" or "managers" of hotels/rooms | OTAs perform key hotel functions (reservations, payments, customer service) and therefore operate/manage hotel accommodations | Performing some hotel-related functions does not equal running or supervising the hotel business or rooms | OTAs are not operators/managers under ordinances; summary judgment for OTAs affirmed |
| Whether OTAs are "engaged in the business of renting" hotel rooms | Municipalities: OTAs market and sell access to rooms and thus engage in renting | OTAs do not grant possession or rent property; they do not own or convey rooms and do not routinely "rent" rooms as landlords do | OTAs not engaged in renting; summary judgment for OTAs affirmed for Rockford and Willowbrook; Lombard grant reversed but judgment to OTAs entered |
| Whether gross-rental-receipts tax applies to the full customer price (including OTA fees) or only hotel-set room rate | Municipalities: "gross rental receipts" should include the full amount the customer paid to OTA | OTAs: tax applies to hotel’s gross rental receipts (hotel-set rate), and municipalities already received taxes on that amount | Court held that, under ordinances, OTAs are not liable to collect/remit on the full OTA-collected price; OTAs win except prior Lombard ruling reversed and judgment for OTAs entered |
Key Cases Cited
- United Cent. Bank v. KMWC 845, LLC, 800 F.3d 307 (7th Cir.) (standard of review for summary judgment)
- Landis v. Marc Realty, L.L.C., 235 Ill.2d 1 (Ill.) (statutory interpretation follows Illinois rules)
- In re Consol. Objections to Tax Levies of Sch. Dist. No. 205, 193 Ill.2d 490 (Ill.) (tax statutes strictly construed for taxpayer)
- People v. Beachem, 229 Ill.2d 237 (Ill.) (statutory ambiguity definition)
- State Farm Mut. Auto. Ins. Co. v. Pate, 275 F.3d 666 (7th Cir.) (standards for certifying state-law questions)
- Pitt Cty. v. Hotels.com, L.P., 553 F.3d 308 (4th Cir.) (OTAs do not operate hotels)
- Mont. Dep't of Revenue v. Priceline.com, Inc., 354 P.3d 631 (Mont.) (OTAs not owners/operators under comparable tax law)
- Carollo v. Al Warren Oil Co., Inc., 355 Ill.App.3d 172 (Ill. App. Ct.) ("engaged in the business" context)