California: Online travel companies not liable for unpaid transient occupancy taxes

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In an opinion filed last week, the California Supreme Court affirmed the lower court’s decision by ruling that hotels, and not the online travel companies (OTCs) on whose websites many travelers book and pay for their hotel reservations, are liable for the transit occupancy taxes incurred under a City of San Diego ordinance. The court reasoned that the statute at issue has a limited reach, such that only an “operator” can be subject to the assessment of taxes and penalties, and an OTC does not qualify as an operator within the definition.


The plaintiff, the City of San Diego, sued a number of defendants, all OTCs, for their failure to remit or collect the transit occupancy taxes on their transactions. The defendants in the case are; L.P.;, Inc.; Travelweb LLC; Expedia, Inc.; Hotwire, Inc.; G.P., LLC;, LP;, LLC; Orbitz, LLC;;, LLC; Trip Network, Inc. (doing business as; and Internetwork Publishing Corp. (doing business as However, this suit, along with a class action initiated by the City of Los Angeles on behalf of other California jurisdictions, alleging similar claims, were coordinated in the Los Angeles County Superior Court as the Transient Occupancy Tax Cases

Under the business model at issue here, the OTCs contract with hotels to advertise and rent rooms to the general public, and handle all financial transactions related to the hotel reservations. The OTCs do not themselves own, operate or manage hotels, maintain an inventory of rooms, or possess or obtain the right to occupy any rooms. 

The OTC charges its customers retail room rates plus a tax recovery charge, which is the OTC’s estimate of the hotel’s transit occupancy tax liability for that transaction. Once the customer checks in, the hotel bills the OTC for the price of the room plus the tax, after which the OTC remits the charged amount to the hotel, and then the hotel, in turn, remits the tax to the city. 

The statute

Under the San Diego ordinance, any customer in a hotel in the city is subject to a transit occupancy tax of 6 percent “of the rent charged by the operator” for the privilege of occupying that hotel. The ordinance requires the proceeds of the tax to be used for promoting San Diego, including by planning, building, and maintaining tourism-related cultural, recreational, and convention facilities, among other things. 

The statute further provides that the operator must remit the full amount of the previous month’s collected tax. For refusal to collect or remit the tax, the city’s treasurer is obligated to assess the tax and penalties against that operator. 

The case turned on the statutory definition of the word “operator,” which “includes a managing agent, a resident manager, or a resident agent, of any type or character, other than an employee without management responsibility.” 

The arguments and the court’s rationale

The decision leading to San Diego’s appeal was that while the ordinance imposes tax on rent charged by an operator, an OTC is not an operator or managing agent of the hotel. Nor is the markup the OTCs charge for their services a part of the rent subject to the tax. 

San Diego argued that the tax base for calculating the amount due should be the full amount that the customer pays to obtain occupancy, not the lesser amount the hotel has agreed to accept as its share of the rental proceeds. 

While the court agreed that the full amount should be subject to the tax, it also concluded that the ordinance did not contemplate assessing an intermediary, like an OTC, for any unpaid portion of the transit occupancy tax. Moreover, the court pointed out that the statute identifies the taxable amount as the “rent charged by the operator,” which does not include any discretionary markup charged by the OTC. Even so, the court acknowledged that the rate charged by the OTC “is seldom significantly higher than the rate a hotel charges to its customers directly,” so any difference “may be chimerical.” 

To San Diego’s argument that even if OTCs are not operators, they should still be liable for the tax as facilitating agents of the hotel, the court disagreed with the premise. Hotels do not have any control over additional amounts an OTC charges for its services, so should not be considered agents. 

Finally, the court declared, whatever contractual provisions exist between an OTC and hotel, such contracts cannot create or expand tax liability. 

Next steps

According to a Bloomberg analysis, the $21.2 million assessment that the court struck down could be seen as a major win for OTCs. However, a lawyer for the city opined that “[i]n my view, the OTC’s won the battle, but lost the war…[t]here is nothing to prevent San Diego, using this opinion, to sue the hotels.”

Similarly, a lawyer for the California State Association of Counties characterized the conclusion as a “mixed bag for municipalities.” He predicted that “the industry and hotels will collaborate to change the terms of their private agreements to escape the tax.” 

The Hotel Council of San Francisco criticized the ruling, characterizing it as as an “inequitable two-tier tax system that favors online travel companies over hotel companies [that] puts the burden of tax collection on hotels for bookings made by online travel companies, giving those companies special status from paying the taxes that often fund what attracts visitors to California cities.”

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