On Monday, the California Supreme Court issued its ruling that the City of San Diego cannot collect hotel occupancy taxes from Online Travel Companies (OTCs) such as Expedia, Priceline, and Travelocity. While the California Supreme Court ruling is in line with numerous other lawsuits between local governments and OTCs across the country, it left open the possibility for a local government to collect additional hotel occupancy taxes from the hotel operator when they require an OTC to charge fees in addition to the contracted rate.
Proponents of these cases have argued that hotel operators generally contract with an OTC by offering rooms at discounted wholesale rates while requiring them to charge a fee to ensure that the price the OTC offers reflects the price the hotel operator would have similarly or otherwise charged. Further, local governments have argued that the hotel occupancy tax should be assessed based on the full retail price to the consumer and not just the amount stipulated in the contract between the OTC and the hotel operator. OTCs have argued that the difference between the wholesale/contracted price and the retail price they charge a consumer is a service fee they collect for processing the transaction on behalf of the hotel operator, and that service fees are exempt from taxes.
Over the past several years, more than 20 other states have reviewed similar cases and concluded that OTC service fees are exempt from sales taxes. However, at least six states have ruled in favor of local governments and require taxes to be paid on the full retail price to the consumer. With the California Supreme Court leaving the window open for the City of San Diego to collect additional hotel occupancy taxes from hotel operators, and other rulings throughout the country, it remains to be seen how these disputes will progress or how the state and or federal government may intervene.