In the case The City of Chicago v. Expedia, Inc., et al, an Illinois Court of Appeals, siding with the defendant travel companies Expedia, Orbitz LLC, Hotels.com LP, and Hotwire Inc., reversed the lower court’s $29.1 million judgment in the city of Chicago’s favor. In so doing, it ordered the court below to grant summary judgment in favor of the travel companies.
The city of Chicago imposes a 4.5 percent Hotel Accomodations Tax “upon the rental or leasing of any hotel accommodations in the city,” based upon the gross rental or leasing charge.
In addition, there is a surcharge of 4 percent of the gross rental or leasing charge “upon the rental or leasing of any hotel accommodations at any vacation rental or shared housing unit in the city.” 92 percent of the revenue from this surcharge is used for support services for homeless families and the chronically homeless, and the remaining 8 percent is for enforcement of the vacation rental laws, including the registration, licensing, and inspecting of such properties. Though the Chicago Hotel Accomodations Tax, or CHAT, has been on the books since 1973, it has become much more important as the Internet empowered the growth of online hotel and vacation rentals.
The court explained that the defendants here, Expedia, Orbitz, Hotels.com, and Hotwire, use their own websites to provide travel information to consumers, and also to allow these consumers to book hotel rooms and other travel services. The defendant online travel companies (OTC) enter into contracts with hotels to this end, but the hotels can change the quantity of rooms available to any given OTC, and the discounted rate the hotels will charge each OTC.
The websites of all of the OTCs charge customers a total price, broken down into two main components:
- A single room rate, which is the sum of the net rate (the discounted amount that the hotel charges a defendant, set by the hotel), and the OTC’s “facilitation fee.”
- The tax recovery charge, which reflects tax percentages supplied by the hotel to the defendant OTC, and the defendant OTC’s service fees.
The defendant OTCs pay to the hotels both the net rate and the tax recovery charge, which is based on the net rate, and includes taxes such as the CHAT, and it is the hotels that remit the CHAT to the City. The defendant OTCs do not apply the CHAT ordinance to their own facilitation or service fees, nor do they collect the corresponding amount of tax.
The customers are not aware of the components of the single room rate and the tax recovery charge. According to the court, the OTCs and hotels “contractually agree to keep these figures confidential, for the benefit of both the hotels and defendants.”
In detailing the background, the court pointed out that defendants “merely facilitate reservations, through servers that communicate with hotels’ reservation systems.” And as anyone who has used one of these sites knows, “[a]lthough defendants do not own or reserve any blocks of hotel rooms, [they] appear as the merchant of record on credit card transactions for reservations made through them. Additionally, defendants forward such reservations to the relevant hotels, which in turn attempt to honor the reservations. In exceptional circumstances, however, a hotel may be unable to honor a particular reservation.”
In November 20o5, Chicago sued the defendants for, among other things, failing to pay the CHAT on the marked up rate at which they sold their rooms. Defendants answered that they did not sell hotel rooms, nor had they failed to collect and remit CHAT.
During litigation, Chicago argued that the defendants were liable for the unremitted CHAT because they were “owners, managers, or operators of hotels under the ordinance and their share of revenue constituted gross rent.” In contrast, the defendants “maintained that they were merely travel intermediaries who enabled Internet bookings, not hotel owners, managers, or operators subject to the duties imposed by the ordinance. Similarly, the amounts charged for defendants’ services did not constitute rent” as defined in the ordinance.
Eventually, in 2013, the trial court concluded that the defendants were subject to the CHAT and accordingly, had indeed failed to collect and remit the required taxes. In subsequent proceedings, the court also determined that the defendants were liable for penalties owed to the city. Ultimately, as noted above, the court awarded the city a total of $29,103,076.23.
The appellate court’s reversal
The crux of the issue on appeal was whether the CHAT applies to the defendant OTCs and their fees. More specifically, does an OTC constitute an “owner, manager or operator of hotel accommodations?”
Considering this question, the appellate court opined that “[e]ven assuming that defendants sell hotel rooms and were persons statutorily required to collect and remit the CHAT, it does not follow that the ‘gross rental or leasing charge’ includes their facilitation and service fees. Thus, the city is not entitled to additional tax revenue.”
What is more, the CHAT ordinance does not define “gross rental or leasing charge.” Looking to previous cases for direction, the appellate court determined that the defendants’ facilitation and service fees are not part of the gross rental or leasing charge.
Finally, the court observed that part of the defendants’ earnings came from the provision of information on their sites, like reviews, available amenities, comparisons, as well as the sites’ convenience, and the defendants’ activities negotiating discounts, while also recognizing the defendants’ right to make a profit.
This was relevant because it showed that “ customers pay defendants’ aptly named service and facilitation fees in exchange for a convenient manner of making reservations as well as the benefits of defendants’ prenegotiations, rather than the right to occupy hotel rooms.” of this meant that, contrary to the city’s contention, facilitation and service fees do not constitute rental or leasing charges.
On this reasoning, the appellate court reversed the trial court decision below and remanded with the order to grant summary judgment in the defendants’ favor.