Tax is Based on Amount Paid to Hotel, Not Amount Charged by Online Travel Companies in California

A California court has found that transient occupancy tax is based on the room rental received by the hotel, not on the amount paid to an online travel company (OTC) by the customer. Santa Monica attempted to enforce its transient occupancy tax against several OTCs. The city alleged that the OTCs enter into contracts with hotels, under which the OTCs act as independent, nonexclusive sales agents for hotels and must collect and remit the transient occupancy tax on the total price paid by the customer. The OTCs sell nightly lodging licenses provided by the hotels on behalf of the hotels. After the sale of a license, the OTC collects all funds from the customer and takes a commission before passing the remaining money to the hotel. The OTC also collects and retains tax on the value of the commission. The hotel only receives tax for remittance to the city on a portion of the total charge for lodging. The OTCs argued that the local transient occupancy tax should be based on the amount paid to the hotel for the room. The court reviewed the tax law and found that the tax is properly calculated based on the sum paid to the hotel. Regardless of whether a customer pays a hotel directly or an intermediary, the tax is based on the total amount paid to the hotel for the room rental. The court found that the statute is silent in regards to whether the hotel exercises control over the price charged by a reseller or intermediary. As such, a charge made by a hotel to a customer within the definition of a room rental must be interpreted to refer to charges paid to the hotel. The hotel does not receive the commission. The city argued that the step transaction doctrine dictates that the OTCs sales to customers should be taxed based on the total amount paid by the customer. The court found that the language of the ordinance does not support a conclusion that the purpose of the local ordinance is to base the tax on the amount paid by the customer, as opposed to the amount paid by the customer or an intermediary to the hotel. (City of Santa Monica v. Expedia, Inc., California Superior Court for Los Angeles County, No. JCCP 4472, March 16, 2011)