United States: Alabama Supreme Court Holds OTCs Are Not Subject To Lodgings Taxes

The Alabama Supreme Court adopted a trial court's summary judgment order¹ in its entirety as its opinion, holding that a group of online travel companies (OTCs), facilitating hotel reservations, were not liable for state or local lodgings taxes on the amounts paid by consumers to book the room versus the amount paid as consideration to the hotel (the discounted price negotiated between the OTCs and the hotels).² Pursuant to the state statute and the municipal ordinances, the lodgings taxes applied to hotel operators "engaging in the business of renting or furnishing" rooms to transients. The Court found that the OTCs were not hotel operators subject to the taxes.

Background

OTCs collect and publish travel-related information on the Internet. They also facilitate the making of hotel room reservations by customers who go online and obtain comparative information about lodging options in a particular travel area. When a customer reserves a room through an OTC Web site, he or she pays an amount for the occupancy of the room, a lodgings tax recovery charge, and an additional amount for the OTC's services. The OTC then remits the room rental charge and the lodgings tax amount to the applicable hotel. The hotel ultimately pays the taxes to the state and appropriate municipality. The question that has arisen in a number of jurisdictions throughout the United States is whether the OTCs are liable for the lodgings tax on the entire amount they have charged to customers.

A number of Alabama municipalities and the Birmingham-Jefferson Civic Center Authority (municipalities) filed a complaint against a group of OTCs, seeking a declaratory order that the OTCs were engaged in the business of renting rooms or lodging or furnishing accommodations to transients and that, as a result, they were subject to and liable for the lodgings tax for any rooms they rented. The OTCs filed a motion to dismiss the complaint on the grounds that the complaint failed to state a claim upon which relief could be granted. Following the court's denial of the motion, the parties engaged in discovery, and the OTCs subsequently filed a Motion for Summary Judgment.

The trial court entered an order in favor of the OTCs and the municipalities appealed the order to the Alabama Supreme Court.

OTCs Not Subject to State or Local Lodgings Taxes

The Alabama state lodgings tax is levied and imposed upon "every person, firm or corporation engaging in the business of renting or furnishing any room or rooms, lodging or accommodations to transients in any hotel ... for a consideration."³ Municipalities are authorized to impose similar lodgings taxes so long as they "parallel" the state tax.⁴ The Alabama Supreme Court agreed with the trial court's conclusion that this meant that municipal ordinance provisions imposing the lodgings tax "must contain the same language as in the [state] statute." Each of the municipalities in the case enacted lodgings tax ordinances that contained language imposing the tax on "each person ... engaging ... in the business of renting or furnishing any room ... in any hotel."

In addition, the Alabama Department of Revenue issued an administrative rule interpreting the statute to provide that only hotel operators that "rent or furnish" rooms are subject to the lodgings tax.⁵ The Department also determined in its rule that OTCs are not hotel operators, but are service providers not engaged in the business of renting or furnishing rooms.⁶ The trial court and the Supreme Court noted that the Department's opinion was persuasive, though not binding.

Rules of Statutory Construction

Prior to engaging in its analysis of the issue, the Supreme Court, by adoption of the trial court's order, discussed the rules of statutory construction under Alabama law. The Court noted that "words in a statute must be given their natural, plain, ordinary, and commonly understood meaning." If the statutory language is unambiguous, then there is no need for the Court to determine the legislature's intent in drafting the statute. To do so would be inappropriate because the Court is not a legislative body. Its role is limited to interpreting the law.

OTCs Not Engaged in Business of Renting or Furnishing Rooms

In reaching its determination that the OTCs were entitled to summary judgment in their favor, the Court noted that the state statute is not ambiguous and as required by statute, any ordinances imposing the lodgings tax must contain similar language that is also unambiguous. Specifically, the lodgings tax only applies to those "engaging in the business of renting or furnishing any rooms, in any hotel." The Court agreed with the Department's interpretation in its regulation and concluded that OTCs are not hoteliers because they do not rent or furnish rooms, or operate hotels in any of the cities involved in the case. Instead, OTCs provide a service that is not subject to the state or local lodgings taxes.

The Court further remarked that other jurisdictions, having considered the same issue, have decided based upon the specific language of the relevant statute or ordinances. The specific Alabama statutory language controlled the outcome.

Citing a lack of supporting evidence, the Court rejected an additional argument from the municipalities that even if the OTCs were not considered "engaged in the business of renting or furnishing rooms," there was an issue of material fact as to whether the OTCs were acting as agents of the hotels.

Based on the foregoing considerations, the Court affirmed the trial court's summary judgment order in favor of the OTCs.

Commentary

The Alabama Supreme Court's decision adds to the growing volume of cases decided on OTC transactions. As with recent Tennessee and Pennsylvania decisions,⁷ the Alabama Supreme Court decided the issue based on the precise language contained in the applicable laws.

The Alabama Supreme Court pointed out the possibility of the legislature changing the result of its decision by revising the language of the statute to broaden the reach of the lodgings tax to include OTCs. This would beg the question as to whether the state should tax service commissions paid to travel companies for other bookings, such as rental cars or flights.

Interestingly, the Court dismissed the argument that the OTCs were agents of the hotels because there was no evidence of an agency relationship, but it did not go so far as to rule out the agency argument as a possibility for reaching an opposite conclusion. Had the municipalities produced contractual language supporting an agency relationship, they may have won the issue under the agency theory.

Moreover, the municipalities could have argued that the OTCs were resellers of the hotel rooms. While there are challenges to this argument (i.e., the OTC does not take title or possession of the hotel rooms), it has seen some success in certain jurisdictions.

The Multistate Tax Commission (MTC) is currently working on model legislation that would address this issue, either by requiring hotels to collect and remit tax on the entire retail price, or by requiring the hotels and the OTCs to work together to ensure collection and remittance of the tax on the entire retail price.⁸ Meanwhile, OTCs are seeking congressional action that would propose federal preemption from all state and local taxes imposed on hotel rooms when they are purchased through their Web sites.

Footnotes

1 The Alabama Supreme Court quoted and affirmed the entire order entered by the trial court, City of Birmingham v. Orbitz, LLC, Jefferson Circuit Court, CV-09-003607, 2011 Order Granting Final Summary Judgment in Favor of the OTCs. The Court stated, "we agree with the views expressed by Judge Vowell [trial court judge] in his thorough and well reasoned summary-judgment order. We therefore affirm the judgment in favor of the OTCs, and we adopt Judge Vowell's order in its entirety as the opinion of this Court."

2 City of Birmingham v. Orbitz, LLC, Alabama Supreme Court, No. 1100874, April 13, 2012.

3 ALA. CODE § 40-26-1(a). (Emphasis added.)

4 The trial court pointed out that in 1969, the state legislature enacted ALA. CODE § 11-51-202(b), "[t]he governing body of any municipality within the State of Alabama may provide by ordinance for the levy and assessment of a privilege or license tax in the nature of a lodgings tax, parallel to the state levy...."

5 ALA. ADMIN. CODE r. 810-6-5-.13(5).

6 ALA. ADMIN. CODE r. 810-6-5-.13(4).

7 Goodlettesville, Tennessee v. Priceline.com, U.S. District Court, Middle District of Tennessee, Nashville Division, No. 3:08-cv-00561, Feb. 21, 2012; Philadelphia v. Philadelphia Tax Review Board, Commonwealth Court of Pennsylvania, No. 216 C.D. 2011, Feb. 2, 2012.

8 The MTC's proposal, "Model Statutes for the Collection and Remittance of Lodgings Taxes by Accommodations Intermediaries," has been reviewed by the MTC's Executive Committee, and a public hearing on the proposal was held by the MTC on April 10, 2012.

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