A 4-2 decision issued by the Mississippi Supreme Court in the case Priceline.com LLC et al. v. Lynn Fitch released Priceline and their co-plaintiffs from hotel taxes previously levied by a lower court in Mississippi. This case hinged on definitions under the Mississippi Code and what the nature of the service being provided was.
The chancery court determined that based on MS Code Section 27-65-23 and the hotel tax created therein, the Online Travel Companies (OTCs) were liable for more than $10 million in overdue taxes and an additional $50 million in penalties and interest. The argument put forth by the state and supported by dissenting opinions to the judgment was that the OTCs were subject to a 7% tax because they were providing hotel services by acting as the primary contact point for consumers looking to rent hotel rooms, going so far as to guarantee the room once it is booked through the OTC. The OTCs were subject to penalties and interest because the OTCs knew about their tax exposure and did not make any effort to remedy the situation.
The OTCs’ arguments were strongly rooted in the definition of “hotel” as they made the case they should not be assessed for the tax. In the current version of MS Code 27-65-23, there is a definition which states, “…’hotel’ shall mean… an entity or individual engaged in the business of furnishing or providing one or more rooms designed for dwelling, lodging, or sleeping purposes…and that are known to the trade as such…”. This definition, the OTCs claimed, did not match their business models as they were not the ones providing the lodgings. The OTCs argued they were marketplace facilitators, defined under the 2020 Marketplace Facilitator Act as “…any person who facilitates a retail sale by a seller by: (i) listing or advertising for sale by the retailer in any forum…; and (ii) … collecting payment from the customer and transmitting that payment to the retailer…”.
The Court considered the definition of “hotel” carefully in its decision, noting the long-established rule that any ambiguities in law should be considered favorably for the taxpayer and against the taxing authority (State Tax Comm’n v. Edmondson, MS 1967). Since the legislature had created a distinction between hotels and travel intermediaries, the Court considered the definition of “hotel” provided, finding that the OTCs do not meet the definition. They drew a parallel to the case MS Dept of Revenue v. EKB, Inc (MS 2022), where the court determined a disk or drive provided by a wedding photographer was incidental to the actual service provided, which was the wedding photography. In this case, the hotel rooms are incidental to the intermediary services provided by Priceline and the other plaintiffs. The travel sites do not provide any rooms and therefore fail the first test. This failure to meet the definition of “hotel” was furthered by evidence supporting the fact the OTCs do not meet the second requirement either – they are not known in the travel or hospitality industries as hotels. The Court further examined local hotel laws and found that these jurisdictions had definitions of “hotel” as well and again, the OTCs could not be considered hotels. Because of these findings, the Court reversed the chancery court’s decision granting the damages, penalties, and interest.
This case highlights the importance of clearly defining a business and the services offered by that business and in knowing the definitions provided by the taxing authorities in localities. Taxpayers should take care to make sure that they are correctly classified under all state and local laws, noting what the primary service is as opposed to any incidental services. Like the OTCs and the wedding photographer mentioned in the decision, it is key to consider why clients are using a certain party and not just the end result. It is also important to be aware of state or local laws which define business definitions and see how they apply to individual taxpayers and their business models. If a definition is ambiguous, it is worthwhile to look at the tax implications and determine how it applies in each individual case. (Priceline.com LLC et al. v. Lynn Fitch, Attorney General of the State of Mississippi ex rel. Mississippi, case number 2021-CA-00868-SCT, decision published 9/28/2023)