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Tuesday, December 5, 2017

7th Circuit Finds Online Travel Agencies Are Not Subject to Certain Municipal Hotel Taxes

The Seventh Circuit recently issued a decision finding that online travel agencies (Expedia, Priceline, Travelocity, and Orbitz) are not subject to municipal hotel taxes. 

In Village of Bedford Park v. Expedia, Inc.,et al, thirteen Illinois municipalities filed a class action claiming that these online travel agencies (Agencies) were failing to remit taxes on the full price that customers pay to rent a hotel room. The Agencies enter into contractual arrangements with hotels that allow the Agencies to market hotel rooms and directly book reservations through their websites. The hotel sets a wholesale rental price for the room, and the Agency charges the customer a price that includes the hotel rental price, the estimated taxes owed to the municipality, and additional charges for the Agency’s services.

However, the Agencies had only been remitting taxes to the municipalities based on the wholesale rental price set by the hotels, not the full price paid by customers to the Agencies. The court gave the example of a hotel that sets a wholesale rental price for rooms reserved through an Agency at $60, and the total price charged by the Agency to the customer (including the fees for the Agency’s services) is $100. The Agency only pays taxes on the $60 rental rate, instead of the full $100 that is charged to the customer. The municipalities argued that the Agencies needed to remit taxes based on the full $100 amount.

The Seventh Circuit considered two main categories of municipal hotel taxes: (1) those that impose a room rental tax on owners, operators, and managers of hotels; and (2) those that impose a tax on persons engaged in the business of renting, leasing, or letting hotel rooms based on a percentage of gross rental receipts. 

First, the Seventh Circuit considered whether the Agencies were owners, operators, or managers of hotels, and therefore subject to the first category of municipal hotel taxes.  The Court found that the Agencies clearly are not owners of the hotels, nor are they owners of the hotel rooms themselves.  The Court also found that the Agencies are not hotel managers because they do not supervise the affairs of a hotel. The Court did note that the Agencies are engaged in one hotel function, the making of hotel reservations. However, the Court held that simply engaging in one aspect of running a hotel does not transform the Agencies into hotel operators. Therefore, the Court found that the Agencies are not hotel owners, operators, or managers subject to the first category of municipal hotel taxes.

Next, the Court considered whether the Agencies are subject to taxes imposed on persons engaged in the business of renting hotel rooms. The Court noted that renting implies ownership and the ability to grant possession of property. Since the Agencies do not own hotels or hotel rooms, they cannot independently grant consumers access to hotel rooms. Because the Agencies lack the ability to grant access to hotel rooms, they necessarily lack the power to rent hotel rooms. Accordingly, the Court held that the Agencies are not engaged in the business of renting hotel rooms, and are not subject to the second category of municipal hotel taxes.

This opinion is interesting because a very similar issue was previously addressed in the case of City of Chicago v. Expedia, et al, 2017 IL App (1st) 153402, which we reported on in May of 2017.  In that case, an Illinois Appellate Court found that the Agencies were not subject to the City of Chicago’s hotel tax on substantially similar grounds. However, that opinion was subsequently withdrawn by the appellate court after the City of Chicago and the Agencies reached a multi-million dollar settlement. The City of Chicago subsequently amended its hotel tax to clarify that it applies to the Agencies as well as hotels.

Post Authored by Kurt Asprooth, Ancel Glink


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