The U.S. District Court of the Northern District of Georgia has ruled that online travel companies (OTCs) that facilitate hotel reservations were not liable for taxes on the amounts paid by consumers to book the rooms for transactions taking place on or before May 16, 2011.1 However, had the municipalities seeking the tax presented evidence to compute the damages, the Court may have granted them with respect to the OTCs' failure to collect proper tax amounts on "breakage transactions" that occurred on or prior to May 16, 2011.2
Background
Municipalities in Georgia filed a suit against a group of OTCs for failure to identify taxes charged and paid by hotel guests and for failure to remit the taxes. The municipalities subsequently filed a motion for summary judgment based on the Georgia Supreme Court's decision, City of Atlanta v. Hotels.com,3 which held that the OTCs were not liable for back taxes. In a partial settlement agreement, the parties agreed to pay the difference between the hotel occupancy tax calculated on the wholesale rate versus the tax calculated on the retail rate for all hotel occupancies occurring after May 16, 2011.
Online Travel Companies
OTCs book hotel rooms and make other travel arrangements for customers over the Internet under what has been labeled the "merchant model" of business. OTCs first enter into contracts with individual hotels and negotiate a discounted rate for each hotel room, commonly termed the wholesale rate. OTCs then offer reservations of the rooms to the public at a rate that includes the amount paid to the hotel operator plus taxes and service fees. When a customer books and pays the total amount to an OTC, the OTC pays the wholesale rate and hotel occupancy taxes to the hotel. After customers complete their stay at a hotel, the hotel remits the taxes to the appropriate taxing authorities.
Hotel Occupancy Tax
Georgia's excise tax on rooms, lodging, and accommodations (the Enabling Statute) authorizes a municipality to impose and collect an excise tax on accommodations furnished by a person or legal entity licensed by, or required to pay business or occupation taxes to, the municipality for "operating a hotel ... or accommodations," which "are regularly furnished for value."4
Under the Enabling Statute, the hotel occupancy tax is imposed on "any person or legal entity licensed by or required to pay a business or occupation tax to the governing authority imposing the tax for operating a hotel ... or accommodations ... and shall apply to the furnishing for value of any room, lodging, or accommodation."5
With respect to the tax base, the tax applies to "the lodging charges actually collected, or if the amount of taxes collected from the hotel or motel guest is in excess of the total amount that should have been collected, the total amount actually collected must be remitted."6 The Enabling Statute provides that the person or entity collecting the tax is required to remit the tax to the governing authority.7
The Georgia Supreme Court, in City of Atlanta and City of Columbus,8 determined that the Enabling Statute required OTCs to remit hotel occupancy taxes based on the retail rate on a prospective basis "so long as" they continued to voluntarily collect and remit the taxes, but that the OTCs were not required to pay back taxes. According to the Georgia Supreme Court, if the OTCs ceased to collect the tax, then the issue would be "moot." The Georgia Supreme Court also found that the enforcement provisions of the Enabling Statute only applied to "innkeepers" or "hotel operators" and that the OTCs were neither. Therefore, the municipalities did not have a remedy for back taxes.
Claims for Back Taxes
The municipalities made several arguments to allege that they were entitled to back taxes (taxes which would have been incurred on or prior to May 16, 2011) because the OTCs violated the Enabling Statute by failing to collect and remit the proper amount of hotel occupancy taxes based on the retail rate.
Third-Party Tax Collectors
The municipalities argued that they were entitled to back taxes because the OTCs were third-party tax collectors. According to the municipalities, City of Atlanta established that OTCs were third-party tax collectors under the Enabling Statute and as such, they were required to collect tax on the full rental rate charged to the consumer. They also maintained that City of Atlanta had retroactive effect, permitting a remedy for back taxes.
The Court disagreed, stating that it was bound by the state's interpretation of its own laws. Judicial decisions generally have retroactive effect, but state courts may "limit the retroactive operation of their own interpretations of the law."9 This is precisely what the Georgia Supreme Court accomplished in City of Atlanta by explicitly holding that municipalities do "not have a remedy for back taxes." The Georgia Supreme Court found that the collection provisions of the Enabling Statute applied prospectively and that only the enforcement provisions applied retroactively. The Court followed the Georgia Supreme Court's interpretation and determined that the enforcement provisions applied to "innkeepers and hotel operators" and did not apply to third-party tax collectors.
Innkeepers and Operators
The municipalities also argued that the OTCs were liable for back taxes because they were subject to the enforcement provisions of the Enabling Statute as "innkeepers and operators." In support of this argument, the municipalities asserted that the OTCs were innkeepers and operators since they assumed the role of hotels in "virtually every aspect of dealing with consumers leading up to the taxable transaction." The Court rejected this argument, pointing to the Georgia Supreme Court's holding, in City of Atlanta, that OTCs are not innkeepers or operators as a matter of law. The Court followed this decision and found that the enforcement provisions of the Enabling Statute did not apply.
Taxes Collected but Not Remitted
As an alternative argument, the municipalities took the position that the OTCs were liable for back taxes because they collected and failed to remit excess taxes. Pursuant to the Enabling Statute, any person or entity collecting the hotel occupancy tax is required to remit "lodging charges actually collected" or any taxes collected "in excess of the total amount that should have been collected."10
According to the municipalities, in non-breakage transactions, the OTCs collected tax on the retail rate of a room while remitting tax only on the wholesale rate, and in breakage transactions, the OTCs charged consumers for taxes and fees but failed to remit any taxes to the hotels or the municipalities.11
With respect to the non-breakage transactions, the Court did not find that the OTCs collected excess taxes. Although the OTCs presented taxes and service fees as a combined charge on customer invoices, there was no authority showing that such combined charges "were actually collected only as taxes." Furthermore, the cases that the municipalities relied upon stated the rule that substance controls over form when it came to the characterization of an underlying transaction. In the present case, the issue was characterizing the amounts collected from a consumer (and not the underlying transaction).
With respect to the breakage transactions, however, the Court found that the OTCs were liable for taxes based on the retail rate for transactions occurring after May 16, 2011. Georgia law requires the OTCs to pay taxes "actually collected" or any taxes collected "in excess of the amount that should have been collected,"12 and the evidence showed that the OTCs did, in fact, collect excess taxes on breakage transactions. When a hotel failed to invoice an OTC, the OTC collected amounts, at least some of which represented "taxes" that were not remitted to the municipalities or the hotels. Even if the hotels ultimately remitted the hotel occupancy taxes to the municipalities for a consumer stay, the OTCs have still collected and failed to remit hotel occupancy taxes.
Despite the fact that OTCs have collected excess taxes on breakage transactions, the Court refrained from requiring the payment of back taxes because the municipalities did not present a "sufficient computation of breakage damages." Moreover, the municipalities failed to provide either a formula for computation or documents or information required to calculate damages. As a result, under the applicable rules of procedure,13 the Court issued sanctions against the municipalities. Thus, it excluded the municipalities' evidence of past breakage damages and, consistent with the partial settlement agreement, only granted damages for breakage transactions that occurred after May 16, 2011.
Common Law and UDTPA Claims
The municipalities also asserted Uniform Deceptive and Unfair Trade Practices Act (UDTPA) and common law claims. In particular, they claimed that the OTCs violated the UDTPA based on the contention that the OTCs wrongfully retained hotel occupancy taxes, and brought forth conversion, unjust enrichment and breach of constructive trust claims. The Court held that these claims failed as a matter of law.
Prospective Taxes/Declaratory Relief
Pursuant to the parties' partial settlement agreement, the OTCs agreed to pay an initial lump sum for the "Incremental Tax for all Hotel Occupancies occurring after May 16, 2011 through the month ending after the Class Report is filed...."
The Court had already decided, as a matter of law, that the municipalities were not entitled to damages for transactions occurring on or before May 16, 2011. However, with respect to transactions occurring after May 16, 2011, the proper tax base was still at issue. The municipalities argued for an adjustment to the partial settlement agreement (which applied the tax to the retail rate of the room) based on an "alternative base rate," which deems the applicable tax to have been collected as part of the lump sum charge to customers.
The Court rejected the municipalities' argument and stated that the retail rate was the proper tax base. It cited to the Georgia Supreme Court decisions and the trial court decision in City of Columbus.14 Based on the language of the Enabling Statute, the retail rate for breakage transactions occurring after May 16, 2011 was proper because it was the rate that was "represented" to the consumer.
Commentary
This decision is unique with respect to the plethora of recent decisions addressing OTCs and their hotel tax liabilities because the partial settlement agreement was a significant factor for consideration, and the interpretation of the language of the applicable state hotel tax statute was already made at the state court level.
The Court (a federal court) was required to respect the Georgia Supreme Court's interpretation of Georgia's laws. Deciding on motions for summary judgment, the Court's role was limited to the resolution of reasonable doubts about the facts viewed in favor of the non-moving party. The Court did not decide whether the Enabling Statute applied to the OTCs because it respected the Georgia Supreme Court's findings on these issues.
Moreover, since the partial settlement agreement provided that the OTCs would pay the municipalities for the tax not remitted on the retail rate of rooms for transactions after May 16, 2011, the issue before the Court was whether the OTCs owed any hotel taxes for transactions prior to or on May 16, 2011. By entering into the agreement, the OTCs had conceded that they owed tax on the retail rate of rooms on a going-forward basis.
Note that the Court treated breakage transactions differently from non-breakage transactions. The treatment of breakage transactions was an issue that was reserved for litigation (after the parties entered into their partial settlement agreement), and the Court suggested that if the municipalities produced evidence, sufficient to compute the damages for back taxes associated with breakage transactions, the Court would have awarded those particular back taxes. The back taxes for breakage transactions, unlike the back taxes for non-breakage transactions, would have been permitted because the Enabling Statute required entities collecting the hotel tax to remit the hotel tax and there was sufficient evidence to show that excess hotel tax was collected on the breakage transactions where the OTCs did not remit any payment amounts to the hotels or the municipalities. The sole reason the back taxes for breakage transactions were not granted was the failure by the municipalities to provide a means to calculate the damages. As a result, the Court disallowed the request for damages.
Interestingly, while the Court held that the "enforcement provisions" of the Enabling Statute did not apply to the OTCs since they were not innkeepers or hotel operators, it did not address the possibility that the OTCs could fall under the enforcement provisions as "agents of" innkeepers or hotel operators. The enforcement provisions explicitly apply to an innkeeper's agent. They read, "[i]t shall be unlawful for any innkeeper to fail, neglect, or refuse to collect the tax provided in this article [Excise Tax on Lodging], either by himself or herself or through his or her agents or employees."15 The failure to address the agency argument could be viewed as a missed opportunity for municipalities that were seeking recovery from OTCs.
In addition, the case significantly points out that the OTCs are only liable for remittance of tax on the retail rate of rooms, on a prospective basis, if they voluntarily choose to collect the tax. If they do not choose to collect the tax, then under Georgia law, the issue would be moot. Therefore, as applied to OTCs that were not party to this suit or OTCs that did not enter into a settlement agreement with the municipalities, the case allows these non-party OTCs to refrain from "collecting" taxes altogether.
This case illustrates the growing need for authorities dictating the proper hotel tax collection requirements for OTCs. While the case instructs the OTCs that were defendants in the case, its application does not necessarily extend to non-part OTCs. Georgia and its municipalities, as well as other taxing jurisdictions with outdated hotel occupancy tax laws that are seeking additional revenue, may consider revisions to their statutes and codes to explicitly tax an OTC's charge to its customers. Meanwhile, OTCs continue to seek federal legislation that would propose federal pre-emption for all state and local hotel taxes imposed on hotel rooms purchased through OTC Web sites.
Footnotes
1 Order Entered by Judge Harold L. Murphy on July 9, 2012, City of Rome, Georgia, et al. v. Hotels.com, L.P., U.S. District Court for the Northern District of Georgia, Rome Division, Civil Action File No. 4:05-CV-249-HLM. The liability resulting from transactions on or prior to May 16, 2011 was at issue because the parties only agreed to the payment of taxes after that date.
2 In a "breakage transaction," the customer prepays the OTC for a room, including the hotel occupancy taxes, but the OTC does not remit any money to the hotel or municipality. Breakage transactions occur either: (i) when the hotel fails to timely submit an invoice to an OTC or (ii) when a consumer cancels a prepaid room booked through an OTC. In the first type of transaction, the OTC fails to remit tax to the hotels because the hotels do not invoice the OTC. In the second type of transaction, the consumer books and prepays for a room with an OTC, but fails to show up or cancel.
3 710 S.E.2d 766 (Ga. 2011).
4 GA. CODE ANN. § 48-13-51(a)(1)(A).
5 GA. CODE ANN. § 48-13-51(a)(1)(B)(i).
6 Id.
7 GA. CODE ANN. § 48-13-51(a)(1)(B)(ii).
8 See City of Atlanta v. Hotels.com, 710 S.E.2d 766 (Ga. 2011) and Expedia, Inc. v. City of Columbus, 681 S.E.2d 122 (Ga. 2009).
9 The Court cited Findley v. Findley, 629 S.E.2d 222, 226 (Ga. 2006).
10 GA. CODE ANN. § 48-13-51(a)(1)(B).
11 This is due to the hotel's failure to invoice the OTC or the consumer's failure to use a prepaid room reservation.
12 Id.
13 Specifically, the Court cited to the Federal Rules of Civil Procedure 26(a)(1)(A)(iii) and 37(c).
14 Expedia, Inc. v. City of Columbus, 681 S.E.2d 122, 125 (Ga. 2009).
15 GA. CODE ANN. § 48-13-59(a) (emphasis added).
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